RESEARCH houses TA Securities Research and JF Apex Securities Research has ascribed a fair value of RM1.25 for CTOS Digital Bhd which is slated for listing on the Main Market of Bursa Malaysia on July 19.
Entailing a public issue of 200 million new ordinary shares and an offer for sale of 900 million shares, CTOS’s listing is the largest since MR DIY Group (M) Bhd’s RM1.5 bil initial public offering (IPO) last year. Both MR DIY and CTOS come from private equity firm Creador’ stable.
At its IPO price of RM1.10/share, CTOS is priced at a trailing price-to-earnings ratio (PER) of 61.8 times its FY2020 headline earnings per share (EPS) and 63.4 times its FY2020 core EPS, according to TA Securities Research.
“Ascribing a target PE of 40 times FY2022 EPS, we derive a fair value of RM1.25/share,” projected analyst Wilson Loo in an IPO review.
“This takes into consideration the group’s market share leadership in Malaysia, the industry’s high barrier to entry, growth prospects in existing and new verticals, latent growth from plans to pursue acquisitions, strong margins, experienced management team, and strategic major shareholder.”
Meanwhile, JF Apex Securities Research derived a fair value of RM1.25 for CTOS with its valuation based on 50 times PER and FY2021F EPS of 2.5 sen.
“The fair value of RM1.25 represents 14% potential upside and a recommendation to subscribe,” opined analyst Lee Cherng Wee.
“We believe the high multiple is justified given its dominant position in the industry under current digital era and higher growth potential than the established players, such as TransUnion, Equifax and Experian in advanced countries which trade at 30-40 times forward PE.”
Moving forward, TA Securities Research forecasts CTOS’ revenue and core net profit to respectively grow at a compound annual growth rate (CAGR) of 11.7% and 27.7% to RM195.7 mil and RM79.5 mil from FY2020 to FY2023.
“We expect growth to be driven by increasing demand for CTOS’ digital solutions across its key accounts, commercial, and direct-to-consumer segments,” projected the research house.
“This will be underpinned by the rising financial literacy of the population, the introduction of enhanced and new credit services to capture a higher share of wallet and plans to penetrate new verticals with high growth potential including the automotive, real estate, and insurance sectors.”
While the credit reporting industry has high barriers to entry and a key barrier is the access to credit profiles, JF Apex Securities Research identified the following key risks for CTOS:
Expiry of pioneer status and tax incentive: CTOS obtained its MSC pioneer status in 2016 which is expiring in June 2021. CTOS has applied to Malaysia Digital Economy Corporation (MDEC) to renew its pioneer status for another five years. Failure to renew its pioneer status could result in tax rate rising to the normal 24% corporate tax rate instead of the circa 6% tax rate enjoyed previously.
Cybersecurity and technology risks: Cybersecurity attacks could result in illegal access to and leakage of CTOS’ database and customer profiles. Failure to adopt to changes in technology could lead to CTOS losing out to competition.
Prolonged COVID-19 pandemic: The COVID-19 pandemic has most directly impacted a portion of CTOS’ commercial customers, in particular some small medium enterprise (SME) customers whose businesses have proven to be more susceptible to the major economic shock caused by the COVID-19 pandemic.
“CTOS was impacted by COVID-19 from March to May 2020 when it granted short-term payment deferrals for subscriptions and instalment payment plans to certain of customers whose businesses were significantly impacted by the COVID-19 pandemic and the MCO (movement control order),” observed JF Apex Securities Research.
“The group managed to rebound strongly from June 2020 when lockdown restrictions were relaxed. A prolonged pandemic in 2021 could have negative impact on CTOS’ earnings as lower financial transactions nationwide would result in lower demand for CTOS’ products and services.” – July 5, 2021
