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 Credit Suisse and RHB remain gung-ho on CTOS (5301): CTOS DIGITAL BERHAD

KUALA LUMPUR (Oct 6): Credit Suisse has initiated coverage of CTOS Digital Bhd with an “outperform” rating and a target price (TP) of RM2.50, in view of its wide sustainable moat in the credit rating industry, bright industry prospects and anticipated multi-year growth.

In a note on Wednesday, Credit Suisse analysts Danny Goh and Jae Ang said CTOS is deemed to be a leading credit rating agency in ASEAN, with leading presence in the Malaysian and Thailand markets.

“The key factors that should enable CTOS to maintain its market dominance are: i) an extensive database that is difficult to replicate; ii) its strong brand and loyal following; iii) the strict regulatory requirements; and iv) its deeper pockets to build capacity,” the Credit Suisse analysts said.

They added that Malaysia’s credit reporting market size as measured by revenue is expected to see a 13.2% compound annual growth rate (CAGR) over 2021 to 2025 and outpace the ASEAN region’s growth of 10.8% per annum.

"The total addressable market is projected to grow at a much faster pace of 28% per annum over the same period," they said.

According to Goh and Ang, CTOS can sustain a 46% per annum growth in core net profit over 2021 to 2025, driven by rapid growth in revenue of 23% per annum from its key customer segments.

“The key driving factors for this are: i) new products to capture secular growth opportunities; ii) expansion into new verticals; and iii) growth in contributions from newly acquired entities,” they added.

The Credit Suisse analysts noted that key risks to CTOS include regulatory risk that could lead to loss of its credit rating agency (CRA) certificate, access to data resources, acquisition risk, management risk, data integrity and its ability to maintain its pioneer status which would have tax implications.

Meanwhile, RHB Research analyst Liew Wai Hoong maintained his “buy” call on CTOS with a TP of RM2.36 as CTOS management assured that no leaks originated from CTOS or the industry as a whole, and noted that the temporary suspension was purely pre-emptive in nature.

Bank Negara Malaysia (BNM) temporarily suspended Central Credit Reference Information System (CCRIS) services to CRAs last Friday as a proactive, precautionary and necessary step against potential cyberthreats and possibility of a data leak incident in the credit reporting industry.

“[CTOS] management stressed that there is no evidence of any breaches originating from CTOS or the CRA industry as a whole. CTOS claims to be the only CRA with an information technology (IT) security system that meets BNM’s Risk Management in Technology (RMiT) standards. This should give the company an edge over other CRAs in resolving the issue more swiftly,” he said.

He added that with CTOS having the best IT security in the industry, further market share gain is possible should regulators impose stricter standards.

“CTOS spends about RM7 million in capital expenditure (capex) per year, with IT being the biggest component, which includes capex to maintain the RMiT standards.

“We do not rule out the possibility of BNM or other regulators introducing more stringent requirements for CRAs’ IT security system in the wake of heightened cybersecurity threats,” he said.

In the event that this happens, smaller CRAs would face difficulties in meeting the needed investment, which could result in CTOS gaining an even bigger market share, according to Liew.

At 11.56am on Wednesday, CTOS had gained eight sen or 4.21% to RM1.98, valuing the group at RM4.36 billion.


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