CTOS Digital Bhd’s proposed acquisitions are seen by equity analysts as positive and earnings accretive, as well as bringing synergistic benefits and growth acceleration to the group.
On Dec 24, CTOS Digital said in a filing with Bursa Malaysia that it is proposing to buy a 49% stake in financial technology (fintech) specialist JurisTech (Juris Technologies Sdn Bhd) for RM205.8mil cash – the group’s largest ever acquisition since its inception, as well as an additional 2.25% stake in Business Online (BOL) for up to 276.9mil baht (RM34.9mil).
This would increase its stake in BOL to 24.9% (from 22.65% previously).
Kenanga Research says to fund the acquisitions, the research unit assumes CTOS Digital will have a private placement of 136.5 million new shares.
“At a five-day volume-weighted average price of RM1.763, CTOS could raise RM240.7mil, with RM205.8mil for JurisTech and RM34.9mil for BOL. This would expand CTOS’ share base by 6.2%,” it says.
JurisTech, incorporated in 2003, provides an end-to-end credit management platform that allows its clients (mainly banks and financial institutions) to digitally acquire customers, evaluate borrowers, approve loans and recover debt.
Kenanga Research says it will complement CTOS’ existing services of providing credit information and analysis to customers. By combining JurisTech’s software and CTOS’ expansive database, the duo can jointly develop new digital lending solutions that include credit data, software and analytics services.
Such services are popular given banks’ increased digital transformation and enhancement requirements (such as Electronic Know-Your-Customer or e-KYC), and growing demand for data analytics solutions. CTOS and JurisTech can also cross-sell to each other’s’ customers, it notes.
Kenanga Research points out that CTOS is paying 23 times FY21 (financial year ending Dec 31, 2021) estimated price-earnings ratio (PER) for JurisTech.
“There are no direct comparables for a fintech like JurisTech, and its closest competitors are not listed. However, given the evident synergies and scalability of JurisTech’s software services, we think the price is fair. Note that other listed global credit bureaus (not direct comparables) trade at 40 times FY21 estimated PER,” says the research unit.
Kenanga Research adds the acquisitions will increase CTOS’ profits from associates, lifting FY22 (financial year ending Dec 31, 2022) estimated core net profit by 7%.
However, the 6.2% earnings dilution from an enlarged share base would weigh in and only enhance FY22 estimated earnings per share (EPS) by 1%.
Although the earnings accretion is diluted by the placement, Kenanga Research reiterates its “outperfom” call on CTOS’ stock as it allows the group to provide an end-to-end digital lending service. It maintains its fully-diluted target price of RM2 on 55 times FY22 estimated PER, as EPS enhancement is insignificant in FY22.
Meanwhile, RHB Research says it remains positive on CTOS’ growth prospects, given its unique growth preposition in the secular digitalisation trend, and the proposed acquisitions should accelerate growth via new solutions and collaborations.
“We are positive on the EPS-accretive proposals, as they should enable CTOS to expand its offerings and provide integrated digital solutions that encompass data, platform and data analytics capabilities, to capture the immense growth opportunities in digital lending,” says RHB Research.
The research unit also views the acquisition price for JurisTech as “fair”, given the synergistic angle, robust growth prospects, and considering the wide range of valuations among its listed peers in the software space, with distinct differences fundamentally.
RHB Research notes that the acquisition price of RM205.8mil will be subject to further price adjustments after the audit confirmation on the gross value of the proposed capitalisation of internal generated assets by JurisTech.
It points out that as up to five digital banking licences may be issued as early as the first quarter of 2022 and with the emergence of various peer-to-peer lending and micro-lending players, the acquisition will enable CTOS to better equip itself, and put it firmly on the path of becoming a prominent service provider with a unique proposition to capture the growth in this emerging trend.
“Also, potential opportunities to cross-sell and tap into each other’s clientele regionally are other win-win outcomes,” says RHB Research, which maintains its “buy” call on CTOS and a target price of RM2.42.
Meanwhile, Hong Leong Investment Bank (HLIB) Research says it is positive on the developments as they would enhance CTOS’ FY22 estimated EPS by about 5%.
“Our estimates reflect the full dilution from the enlarged share base of 2.34 billion shares arising from the private placement; and about RM8.1mil contribution at the net level from the acquisition both 49% equity stake in Juris Technology and 2.25% stake in BOL,” says HLIB Research.
It opines that while CTOS will maintain its net cash position of RM14.1mil after the three corporate exercises, this is to some degree, an inefficient use of its capital structure.
HLIB Research also estimates that the RM205.8mil for a 49% equity stake in JurisTech would translate into a FY21 estimated PER of 28.5 times.
“Given that there are no direct listed peers, we deem the acquisition to be inexpensive when compared to current valuations of other listed fintech companies such as Revenue Group Bhd (46 times) and GHL Systems Bhd (40 times), based on consensus FY21 estimated earnings estimates,” it says.
However, HLIB Research is slightly negative on the proposed additional 2.25% stake in BOL as it deems the deal to be “a tad bit expensive and would only be very mildly accretive to CTOS’ profits”.
“Based on consensus earnings estimates, this additional 2.25% stake will boost CTOS’ FY22 estimated core earnings by 6.9mil baht (RM0.87mil),” says the research unit.
HLIB Research says it continues to like CTOS as it is poised to ride on the bright prospects of the Asean credit reporting industry, its position as the leading credit reporting agency (CRA) in Malaysia with an estimated market share of 71.2% in 2020, its long-term relationships with its customers with over three decades of history with domestic banks and financial institutions and the nature of its business which has an exceedingly high barrier to entry.
HLIB Research maintains its “buy” call on CTOS with an unchanged discounted cash flow-derived target price of RM2.45 which implies a FY22 estimated PER of 74 times, which is at a premium compared to its global CRA peers’ average FY22 estimated forward PER of 34 times.
“We believe that the valuation premium is justified as we are expecting CTOS to grow faster than its peers, with a FY21 to FY22 estimated growth of 27% and 26% respectively versus an average of 12% and 10% for its global peers.”