(Updated)

CTOS Digital rises 60% over RM1.10 issue price on maiden trading day

(From left) CTOS Digital Bhd independent non-executive director Datuk Azizan Haji Abdul Rahman, independent non-executive chairman Tan Sri Izzuddin Dali and group chief executive officer (CEO) Dennis Martin at the listing ceremony today.

(From left) CTOS Digital Bhd independent non-executive director Datuk Azizan Haji Abdul Rahman, independent non-executive chairman Tan Sri Izzuddin Dali and group chief executive officer (CEO) Dennis Martin at the listing ceremony today.

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KUALA LUMPUR (July 19): CTOS Digital Bhd (formerly known as CTOS Holdings Bhd) debuted on the Main Market of Bursa Malaysia, surging to a high of RM1.76, a 60% premium over its initial public offering price (IPO) of RM1.10.

Opening at RM1.50, the stock ended its maiden trading day at RM1.62, up 47% over the issue price. It was the most active stock on Bursa with its trading volume at 366.36 million shares.

CTOS' share price exceeded all analysts' target prices, according to Bloomberg. (see table)

Kenanga Research pegs its target price (TP) of RM1.40, valuing the credit reporting company at 45 times of its earnings for the financial year ending Dec 31, 2022 (FY22), while UOB Kay Hian Research's TP is at RM1.32, based on 40 times FY22 price-earnings ratio (PER).

This is the largest IPO on Bursa Malaysia thus far this year. The listing exercise raised RM1.2 billion, of which RM220 million was by issue of new shares at RM1.10 per share.

Shares offered to the public under its IPO were oversubscribed by 27.57 times.

The CTOS group provides digital solutions across three core customer segments — the key account segment, which includes leading financial institutions and corporates, the commercial segment, small and medium businesses, as well as over 1.3 million individual customers. 

The group had attracted RM1.38 billion for its retail IPO tranche, the largest retail demand for an IPO since 2013, CTOS noted in a statement.

It added that it had garnered 23 cornerstone investors in its book-building exercise, with renowned names such as Employees Provident Fund Board, Permodalan Nasional Bhd, Aberdeen Standard Investment, AIA, Eastspring Investments, FIL Investment Management and JP Morgan Asset Management.

CTOS group chief executive officer Dennis Martin said the company will focus on providing more innovative digital solutions across the entire lifecycle of financial institutions, companies, and small  and medium enterprises, as well as supporting individuals on their own financial literacy.

“We will also continue to grow our product offerings and customer reach by expanding organically and through acquisitions within the ASEAN region. We believe that the IPO proceeds raised, coupled by our strong financials, will help us achieve our ambitions.

“While growing our track record, we remain committed [to] finding the right balance between reinvesting our profits for sustainable growth and generating shareholders’ returns,” he said in a statement.

CTOS targets a payout ratio of 60% of profit after tax and minority interests (PATAMI) for each financial year on a consolidated basis after taking into account working capital, maintenance capital and committed capital requirements of the group.

CTOS’ stock exceeds target prices of analysts

Kenanga Research, which initiated its coverage of the stock today with an "outperform" call and its TP of RM1.40, opined that CTOS stands to benefit from a growing customer base and expansion of product offerings in the underpenetrated market in Malaysia.

“Cross-selling opportunities are also at hand as the group usually launches one to two new products annually,” Kenanga analyst Adrian Kok said in a note to investors today.

According to Kok, the stock deserves a greater premium over its issue price of RM1.10, which represents a valuation of FY22 PER of 35.5 times versus 31 times for its regional peers.

Kok said CTOS’ fair value (FV) of RM1.40 is pegged at 45 times FY22 PER, justified by its market leader status with a 71.2% share of the underpenetrated market, and more robust industry growth by having a superior compound annual growth rate (CAGR) of 13.2% as compared to the US (7.5%) and the UK (5.3%).

“CTOS benefits from two sides of the coin. It enjoys growth in market size during economic growth while benefits in an economic slowdown from greater frequency of credit checks (more prudent risk management) and stronger demand for its management and monitoring solutions.

“CTOS aims to expand into new sectors with tremendous growth potential, such as automotive, insurance and real estate. The total addressable market for the trio is forecast to grow from RM25.1 million in 2021 to RM128.9 million in 2025, representing a CAGR of 50.6%. CTOS recently launched its new digital solution — CTOS Tenant Screening Report — which will enable it to tap into the real estate sector,” he added.

UOB Kay Hian Research, meanwhile, expects steady growth for CTOS and minimal earnings impact from the Covid-19 pandemic.

To recap, CTOS posted a 64% jump in normalised net profit to RM15 million for the second quarter ended June 30, 2021 (2QFY21) from RM9.1 million for the previous year’s corresponding quarter. Its reported net profit stood at RM11.8 million for the quarter, a year-on-year (y-o-y) increase of 56% from RM7.5 million, while its revenue grew 23% to RM37.8 million. 

While a big chunk of CTOS’ business is habitually recurring income and the group’s countercyclical business model is defensive in nature, CTOS is able to deliver resilient earnings during times of crisis, such as prolonged Covid-19 lockdowns, according to UOB analyst Jack Goh.

“To note, above 75% of CTOS’ key accounts and a significant portion of commercial accounts which made up 80% to 90% of CTOS’s revenue are recurring, while the remaining are one-time-transactional based.

“CTOS recorded a stellar two-year net profit CAGR of 15% in FY18-20. We opine this growth momentum is sustainable in FY21 and beyond, mainly driven by resilient earnings visibility from its large corporate customer base in Malaysia, incremental revenue from newly-acquired associates BOL and Basis, further vertical expansion into and strategic acquisition of selected companies, meaningful credit growth which spurs demand for credit and risk information solutions, and CTOS’ distinctive advantages when combining traditional data sets with advanced analytics and consumer contributed data.

“These factors will provide CTOS with a resilient three-year net profit CAGR of 27% in FY21-23,” Goh added.

UOB maintained its "buy" call for CTOS, with its TP of RM1.32 based on 40 times FY22 PER.

“This is largely in line with the industry’s three-year PER mean of 37 times, which we reckon is justifiable given its multi-year robust growth story and with it being a direct proxy for growing demand for credit reporting in Malaysia.

“In a hypothetical blue-sky scenario, the TP can be as high as RM1.68, which implies 51 times FY22 PER (the industry’s three-year +1SD [standard deviation] above mean PER),” said Goh.

Read also:
CTOS Digital IPO to raise RM1.2b, including RM990m for existing shareholders
CTOS Digital posts 64% jump in normalised net profit for 2QFY21
CTOS’ IPO piques institutional interest

Joyce Goh & Kathy Fong