Comprehensive Analysis of CTOS Digital’s Q3 2024 Performance

Broker: UOB Kay Hian

Date: Tuesday, 12 November 2024

Introduction

CTOS Digital Berhad, a key player in the credit reporting and digital solutions market, has released its third-quarter results for 2024. Despite some fluctuations, the company has shown resilience and strategic growth. Let’s dive into a detailed analysis of CTOS Digital’s recent performance, financial health, and future prospects.

Company Overview

CTOS Digital Berhad is primarily engaged in credit reporting, digital software services, software development, outsourcing, training services, and investment holding. The company also facilitates credit extension and commercializes credit risk management solutions.

Financial Performance

Q3 2024 Results

CTOS Digital’s core net profit for the first nine months of 2024 reached RM28.2 million, marking a 9% quarter-on-quarter growth despite a 4% year-on-year decline. The company’s revenue for Q3 2024 stood at RM79.8 million, a 4.1% increase from the previous quarter and a 20.1% increase year-on-year.

Segment Analysis

• Key Accounts (KA): The segment generated RM38.9 million, experiencing a 2.4% decline quarter-on-quarter but a 31.1% year-on-year growth.
• Commercial: This segment saw a robust 12.3% quarter-on-quarter increase and a 10.8% year-on-year rise, with revenue hitting RM34.3 million.
• Direct-to-Consumer: Revenue grew by 5.7% quarter-on-quarter and 13.2% year-on-year, amounting to RM6.6 million.

Profit Margins

CTOS Digital’s gross profit for Q3 2024 was RM56.1 million, maintaining a steady position with a slight 0.2% decline quarter-on-quarter but a 10.6% year-on-year increase. The EBITDA margin stood at 32.8%, while the pre-tax profit margin was 37.3%. Core net profit margin was reported at 35.3%, reflecting a 1.4% quarter-on-quarter increase but an 8.7% decline year-on-year.

Dividend Payout

The company declared a third interim dividend of 0.84 sen per share, representing a 70% payout ratio, aligning with its minimum dividend policy of 60%.

Future Outlook

Revised Earnings Target

Management has revised its internal earnings target for 2025 to RM125 million-RM130 million, down from the previous RM150 million-RM160 million. This revision is primarily due to a longer sales cycle in the Key Accounts segment and a slower ramp-up in newly secured commercial contracts.

Strategic Acquisitions and Partnerships

CTOS Digital’s recent acquisitions of Prime Analytics and Finscore, along with a strategic partnership with FICO, are expected to enhance its capabilities in the digital lending space across the Philippines, Indonesia, and Thailand. These initiatives aim to bridge the gap for ASEAN’s underserved and unbanked populations.

Regional Market Penetration

Indonesia and the Philippines, with household debt to GDP per capita ratios of less than 20%, contrast sharply with Malaysia and Thailand’s ratios of over 75%. The significant unbanked populations in Indonesia (81%) and the Philippines (75%) provide a substantial market opportunity for CTOS Digital.

Loan Growth and Business Model

Despite a slight moderation in Malaysia’s loan growth, CTOS Digital’s inelastic business model ensures resilience. The company’s products and digital solutions are counter-cyclical, widely utilized in assessing counterparty risk and creditworthiness during economic fluctuations. With over 75% of income from key accounts being recurring, CTOS is well-positioned to benefit from increased activations and income pulls for its business analytics and credit assessment solutions.

Earnings Revision

The company has downgraded its 2025 earnings forecast by 15%, primarily to account for a longer sales cycle in the KA segment and slower ramp-up in newly secured commercial contracts.

Valuation and Recommendation

UOB Kay Hian has upgraded CTOS Digital to a “BUY” with a higher target price of RM1.51, up from RM1.36, based on a rolled-over 28x 2025F PE, reflecting the industry’s five-year mean. The recent share price retracement has likely priced in most headwinds, presenting a favorable risk-reward profile at this stage.

Environmental, Social, and Governance (ESG) Updates

Environmental

CTOS Digital has no significant environmental issues that materially impact biodiversity or climate change.

Social

The company has conducted over 200 financial education roadshows for Malaysian consumers, emphasizing its commitment to social responsibility.

Governance

CTOS Digital adheres to the Malaysian Code on Corporate Governance, ensuring robust governance practices.

Financial Projections

Conclusion

CTOS Digital Berhad is navigating through a complex landscape with strategic acquisitions and partnerships that position it well for future growth. Despite some short-term challenges, the company’s robust business model and market positioning make it a compelling investment opportunity. With an upgraded target price and favorable risk-reward profile, CTOS Digital stands out as a strong player in the credit reporting industry.