KUALA LUMPUR (Dec 16): Hong Leong Investment Bank Research (HLIB Research) has initiated coverage on CTOS Digital Bhd with a target price (TP) of RM2.45 and a “buy” call citing reasons that include its position as the leading credit reporting agency (CRA) in Malaysia with an estimated market share of 71.2% in 2020 and the “bright prospects” of the ASEAN credit reporting industry.

Besides that, HLIB Research also likes CTOS for its long-term relationships with its customers — with three decades of history with domestic banks and financial institutions — and the exceedingly high barrier of entry nature of business.

According to HLIB Research’s analyst Jeremie Yap in a note on Thursday (Dec 16), the International Data Corp (IDC) forecasts that the credit reporting industry in the ASEAN region will grow at a compound annual growth rate (CAGR) of 10.8% between 2021 and 2025 to RM1.61 billion from RM1.07 billion in terms of value.

This, he said, would stem from the CRAs’ heightened penetration and usage of credit reporting services in current sectors and further expansion into new verticals such as automotive, healthcare, media, software and professional services, and the public sector in the ASEAN region.

Yap further noted that CTOS aims to expand its footprint to new verticals in Malaysia, focusing on the automotive, insurance and the real estate sectors via innovative digital solutions.

“According to IDC, the total addressable market for the credit reporting industry for the three sectors is set to grow at a CAGR of 67.3%, 43.7% and 43.2% respectively from 2021 to 2025.

“In terms of combined value, the total addressable market for the credit reporting industry is forecasted to balloon to RM128.9 million in 2025 from RM25.1 million in 2021, which implies a CAGR of 50.6%,” he said.

Meanwhile, Yap said CTOS has enabled direct integration of its database with the systems of some of the financial institutions which had subscribed to its credit reporting services in Malaysia since 1992.

With three decades of long-serving history with domestic banks and financial institutions, Yap viewed that CTOS’ wide array of products and digital solutions, along with its scoring system, allows it to provide a one-stop digital solution for most of the daily operations of the retail and commercial banking industry.

“This makes its services an integral part of most of its customers’ business processes, with reliance and stickiness being developed over a long period of time,” he added.

Yap also observed that CTOS has developed long-term relationships with its customers, including banks, telcos and other corporate customers over the years.

“We gather that CTOS’ products and services have become an integral part of its customers’ business processes, making it difficult for them to switch to solutions offered by another CRA competitor.

“About 75% of CTOS’ key accounts customers’ revenues are recurring in nature and CTOS has retained 100% of its key accounts customers since 2017. CTOS’ top five customers have been the group’s client for a remarkably long period, ranging from 12 to 19 years,” he said.

Yap’s TP for CTOS of RM2.45 is premised on a forecasted FY22 price-to-earnings (P/E) multiple of 74 times, which is at a premium compared to its global CRA peers’ average forecasted  FY22 forward P/E of 34 times.

“We believe that the valuation premium is justified as we are expecting CTOS to grow faster than its peers, with an FY21-22F growth of 27% and 26% respectively (versus an average of 12% and 10% for its global peers),” he said.

He lists risks that include losing access to external data sources, risks of cyberattacks, intellectual property infringement and termination of services by long-term customers.

On Oct 1, 2021, Bank Negara Malaysia (BNM) temporarily suspended its Central Credit Reference Information System (CCRIS) services to all CRAs in Malaysia requiring all of them — including CTOS — to conduct a review of their data assets and infrastructure with independent cybersecurity experts.

CTOS submitted a compromise assessment to BNM on Oct 20, 2021, confirming that the group’s data assets are secure and there were no indications of any data breaches.

“On Nov 17, 2021, CTOS announced that it has received a confirmation from BNM that its access to CCRIS has been restored. Sensitivity wise, for every month of prolonged CCRIS suspension, it would impact the group’s revenue by RM4 million and PATAMI by RM1.6 million — which is 3% of FY21F PATAMI, based on our estimates,” Yap said.

At the time of writing, CTOS’ share price was 0.58% or one sen higher at RM1.73, bringing a market capitalisation of RM3.81 billion with 1.85 million shares transacted so far.