CTOS eyeing bigger stake in RAM, general offer in the pipeline

THE strategic acquisition of RAM Holdings Bhd will fit into the overall business plan of credit rating agency CTOS Digital Bhd especially given its earnings accretive nature.

With RAM being a bond ratings leader with a circa 65% market share, Hong Leong Investment Bank (HLIB) Research said CTOS looks to leverage on the former’s leadership to penetrate into new addressable markets, particularly in the space of smaller bond issuances and high yields by targeting the under-tapped SME segment.

“CTOS has identified that there are 8,500 local companies with yearly revenue of RM50 mil-RM500 mil per annum which it could potentially serve through RAM,” justified analyst Chan Jit Hoong in a company update following a briefing by CTOS.

“Also, there is opportunity to tap into RAM’s large corporate customer pool to cross sell data and digital solutions.”

Moreover, CTOS’ management also sees RAM as having “a lot of room to grow” in the area of non-credit rating offerings like market intelligence and analytics as well as RAM being able to enhance CTOS’ positioning as an expert in credit assessment.

All-in-all, HLIB Research reiterated its “buy” rating on CTOS with a lower target price of RM1.70 (from RM1.95 previously) based on an implied 45 times FY2023 price-to-earnings ratio (P/E) from 52 times previously.

“This is above the global peers’ average (GPA) of 20 times and their five-year mean of 28 times. The premium is warranted given its bright outlook and more robust earnings growth profile backed by the under penetrated ASEAN market,” opined HLIB Research.

“After finding out more about how RAM fits into its overall business plan, we are now convinced with the strategic acquisition. Moreover, CTOS shared that they will hold off further business purchases for the next one to two years and will instead focus on assimilating recent acquisitions.”

Meanwhile, Maybank IB Research expects CTOS’s shareholding in RAM to increase from 19.2% currently to between 51% and 81% following its general offer to the remaining shareholders of RAM at an indicative equity valuation of RM280 mil-RM300 mil.

“The offer will be debt-funded, and likely to be earnings accretive given attractive acquisition multiple of <20 times and synergies to be realised through cross-selling and leveraging on each other’s expertise to further tap into the SME segment,” noted analyst Shafiq Kadir.

“We maintain a ‘buy’ rating and forecasts, but trim our target price to RM1.86 (from RM2.17 previously) based on lower regional median PEG (price/earnings-to-growth) of two times (from 2.2 times previously).”

At 9.20am, CTOS was unchanged at RM1.21 with 198,200 shares traded, thus valuing the company at RM2.79 bil. – June 22, 2022

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