CTOS extends its offerings | The star
The acquisitions proposed by CTOS Digital Bhd are considered by stock market analysts to be positive and generate profits, while providing synergistic advantages and accelerating growth for the group.
On December 24, CTOS Digital said in a filing with Bursa Malaysia that it was offering to purchase a 49% stake in financial technology (fintech) specialist JurisTech (Juris Technologies Sdn Bhd) for RM 205 , 8 million – the largest acquisition ever made by the group since its inception, as well as an additional 2.25% stake in Business Online (BOL) for a maximum of 276.9 million baht (RM34.9 million) .
This would bring its stake in BOL to 24.9% (from 22.65% previously).
Kenanga Research indicates that to finance the acquisitions, the research unit assumes that CTOS Digital will have a private placement of 136.5 million new shares.
“At a five-day volume weighted average price of RM 1,763, CTOS could increase RM 240.7 million, with RM 205.8 million for JurisTech and RM 34.9 million for BOL. This would increase CTOS’s share base by 6.2%, ”he said.
JurisTech, incorporated in 2003, provides an end-to-end credit management platform that enables its clients (primarily banks and financial institutions) to digitally acquire clients, assess borrowers, approve loans and collect debts.
Kenanga Research says it will complement CTOS’s existing services of providing credit information and analysis to customers. By combining JurisTech’s software and CTOS’s extensive database, the duo can jointly develop new digital lending solutions that include credit data, software and analytics services.
These services are popular given the increased demands for digital transformation and improvement of banks (such as Electronic Know-Your-Customer or e-KYC) and the growing demand for data analytics solutions. CTOS and JurisTech can also cross-sell to their respective customers, he notes.
Kenanga Research points out that CTOS pays 23 times the estimated price to earnings ratio (PER) for fiscal year 21 (fiscal year ending December 31, 2021) to JurisTech.
“There are no direct comparables for a fintech like JurisTech, and its closest competitors are not listed. However, given the obvious synergies and scalability of JurisTech’s software services, we believe the price is right. Note that other global credit bureaus listed (no direct comparables) are trading at 40 times the estimated PER for FY21, ”says the research unit.
Kenanga Research adds that the acquisitions will increase CTOS ‘profits from partners, increasing estimated base net income for fiscal 22 (year ending December 31, 2022) by 7%.
However, the 6.2% earnings dilution due to an expanded stock base would weigh on and increase the estimated FY22 earnings per share (EPS) by only 1%.
Although the increase in earnings is diluted by the placement, Kenanga Research reiterates its call for “outperformance” on CTOS shares as it enables the group to provide end-to-end digital lending service. It maintains its fully diluted price target of RM2 at 55 times the estimated PER for FY22, as the improvement in EPS is insignificant over FY22.
Meanwhile, RHB Research says it remains positive about CTOS ‘growth prospects, given its unique growth preposition in the age-old trend of digitization, and the proposed acquisitions are expected to accelerate growth through new solutions and collaborations. .
“We support the EPS generating proposals as they should enable CTOS to expand its offerings and deliver integrated digital solutions that encompass data, platform and data analytics capabilities, in order to capture the huge growth opportunities for digital lending, ”says RHB Research.
The research unit also considers the acquisition price of JurisTech to be “fair”, given the synergistic angle, robust growth prospects and given the wide range of valuations among its listed peers in the software space, with fundamentally distinct differences.
RHB Research notes that the acquisition price of RM 205.8 million will be subject to further price adjustments after confirmation of the audit on the gross value of the proposed capitalization of assets generated internally by JurisTech.
She recalls that given that up to five digital banking licenses could be issued from the first quarter of 2022 and with the emergence of various peer-to-peer and micro-credit players, the acquisition will allow CTOS to better equip itself, and put it firmly on the path to becoming a leading service provider with a unique proposition to capture the growth of this emerging trend.
“Additionally, the potential opportunities to cross-sell and tap into each other’s customer base regionally are other win-win outcomes,” said RHB Research, which maintains its “buy” call on CTOS and an award. target of 2.42 RM.
Meanwhile, Hong Leong Investment Bank (HLIB) Research says it is positive about the developments as they would improve CTOS ‘estimated FY22 EPS by around 5%.
“Our estimates reflect the total dilution of the enlarged share base of 2.34 billion shares resulting from the private placement; and approximately RM 8.1 million at the net level of the acquisition of both a 49% stake in Juris Technology and a 2.25% stake in BOL, ”HLIB Research said.
He believes that although CTOS will maintain its net cash position of RM14.1 million after the three corporate years, this is to some extent an inefficient use of its capital structure.
HLIB Research also estimates that the RM205.8mil for a 49% stake in JurisTech would result in an estimated PER for FY 21 of 28.5 times.
“Since there are no directly listed peers, we consider the acquisition inexpensive compared to current valuations of other listed fintech companies such as Revenue Group Bhd (46 times) and GHL Systems Bhd (40 times), based on consensus estimates of earnings for FY21, ”he says.
However, HLIB Research is slightly negative on the proposed additional 2.25% stake in BOL as it considers the transaction “a bit expensive and would only slightly increase CTOS ‘profits”.
“Based on consensus earnings estimates, this additional 2.25% stake will increase CTOS’s estimated base earnings for fiscal year 22 by 6.9 million baht (RM 0.87 million),” said the research unit.
HLIB Research says it continues to love CTOS because it is ready to take advantage of the bright prospects in Asean’s credit reporting industry, its position as the leading credit reporting agency (ARC ) in Malaysia with an estimated market share of 71.2% in 2020, its long-term relationships with its clients with more than three decades of history with domestic banks and financial institutions and the nature of its business which presents an extremely high barrier to entry.
HLIB Research maintains its “buy” call on CTOS with an unchanged discounted cash flow derivative target price of RM 2.45, implying an estimated PER for fiscal 22 of 74 times, which is a premium per compared to the average term estimate for fiscal 22 of its global CRA peers. PER 34 times.
“We believe that the valuation premium is justified because we expect CTOS to grow faster than its peers, with estimated growth for fiscal years 21 to 22 of 27% and 26% respectively against an average of 12% and 10 % for its global peers. “