PETALING JAYA: Given its scalable business model, CTOS Digital Bhd is expected to continue capitalising and riding on the strong demand wave for credit reporting.
This is driven by rising financial literacy, small and medium enterprise (SME) expansion and the emergence of digital banking.
It is in an under-penetrated industry where credit reporting revenue per capita is about 38 to 56 times smaller than developed nations like the United States and Britain.
Hong Leong Investment Bank (HLIB) Research said the Asean credit reporting market offers huge growth opportunity.
According to market intelligence firm IDC, the market size of its operating countries, Malaysia and Thailand, is projected to expand at a four-year compounded annual growth rate (CAGR) of 13.2% and 6.6% from financial year 2021 (FY21) to FY25.
The research house said CTOS is well placed to capture future opportunities with significant balance sheet headroom and liquidity.
It has forecast the FY22-FY24 profit to rise by 17% to 22%. This is after factoring in the recent purchase of Juris Technology Sdn Bhd (Juristech – a 49% stake) and Business Online Public Co Ltd (BOL – a 2.175% stake), which boosted growth upwards by four percentage points.
The research house also assumes the Multimedia Development Corp tax incentives will be renewed. As without this, it would shave 20% off the research house’s current earnings projection.
It said when stacked against the estimates of the research house’s previous analyst, the upcoming three-year profit forecast is comparable, with a mere 5% variance.
It added that despite being a market leader and already offering a wide array of products and services, CTOS continues to focus on product development.
It is also looking to expand into new verticals such as the automotive, real estate and insurance sectors.
Overall, HLIB Research said it liked CTOS’ “hungry attitude and highly scalable business model”.
However, CTOS is also fairly aggressive in pursuing inorganic growth, observing the string of acquisitions it made over the past three years (BOL, RAM Holdings Bhd and Juristech).
However, it added that while it can appreciate the quick boost to the bottom line, continuous acquisition diligence must be exercised to prevent free cash-flow wastage and avoid frequent cash calls.
Besides, it said it preferred to see positioning into more meaningful controlling stakes to better unlock full synergistic potential of any future acquisitions.
The research house has maintained its “buy’’ call, with a refreshed target price of RM1.95 a share from RM2.45 previously. This is based on an implied 52 times FY23 price-to-earnings ratio.