CTOS Digital Bhd closed its initial public offering (IPO) debut at RM1.62, which is 47% above its IPO price of RM 1.10. Considering the weak market sentiment amidst raging Covid-19 cases in the region and political uncertainty, I would say the IPO was a huge success.
In addition, we must note that the CTOS IPO offering was on the higher end of the valuation (45 times the price earnings ratio or PER). At today’s market price, it is trading at 68 times the forward PER. Calculated simplistically, it is expensive by any metrics.
However, what matters isn’t just the PER valuation of the business. There are certain qualitative factors to consider.
Prior to the IPO, I chose not to write about CTOS as there were many writers commenting on the stock across all forums. An additional opinion doesn’t matter as much.
What prompted me today, however, was because I noticed a brokerage’s telegram channel which was bullish on CTOS, directly encouraging retail investors to take position citing MR DIY’s IPO performance as a benchmark. I do not think this is a fair justification to invest in a stock.
MR DIY and CTOS are completely different sectors although they have the same private equity (PE) fund backer. Based on this rationale, as MR DIY’s share price went up close to three times from its IPO price, does it mean CTOS would also go up in the same quantum?
Many unknowing retail investors, especially those who are new to investing, may take it at face value and just plough into the stock. It is necessary to look at CTOS from various angles before making a decision, not just benchmarking a previous IPO performance.
CTOS in itself is a household name as most of our financial data is readily available or compiled by CTOS. Its usage is as close to a daily essential or necessity in the commercial world. I do not deny the near monopolistic position (market leader) of CTOS in Malaysia’s credit rating reporting sector gives it a shining halo.
If you look at CTOS from the lens of the credit rating reporting sector, it is in my humble view that CTOS is rather steep in valuation accorded by the market. There are other companies which are far more profitable and scalable with higher dividend yield or at least real returns for investors.
In short, it is expensive. To determine if CTOS is a viable investment, there is a need to also look beyond our shores for comparison of companies within the same sector, as Malaysia is after all a very small market.
The notable names in this sector are Experian Plc which is listed on the London Stock Exchange and Equifax Inc that is on the New York Stock Exchange. The table shows the valuation multiple and market capitalisation comparison of the companies within the space. You can see clearly, that against the bigger and more established names in the sector, CTOS is trading at a much higher valuation.
However, if you look at CTOS from the view of a fintech play or at least an important part of the fintech space (with digital bank development for Malaysia in the near future), then this is something else altogether.
It is similar to the electric vehicle (EV) space, whereby any stocks related to EV go crazy in terms of market interest and premium for its valuation. What I have learnt from the stock market in the past two years especially with the influx of millennial retail investors would be; they are willing to pay for a stock which is related to “theme of the future” regardless of the fundamentals.
Whether this is rational or not is a topic for another day. In addition, there is the plus point of scarcity premium and growth prospect considering CTOS has only started to embark on regional expansion.
Apart from looking at CTOS from the two lens mentioned above, an important perspective would be Creador’s role in the middle of all these. CTOS is not like MR DIY. It is the pride and legacy of this PE firm.
Early on in 2014, before Creador achieved today’s market reputation and status, Creador bought a 70% stake in CTOS Holdings for RM215mil in September 2014 through its second fund and later on another 10% stake at RM45mil (total RM260mil for an 80% shareholding).
Through the IPO, Creador offered 720 million shares (36%) for sale via the listing exercise. The fund pockets a cool RM792mil cash. This nets a gross gain of three times for the 36% stake alone.
Not forgetting the balance 40% stake (880 million shares post-enlarged issuance) which is at present day worth RM1.41bil. Let’s say Creador were to exit in full today, the PE fund would net a gross gain of RM1.94bil before deducting expenses, interest cost amongst others. That is 7.5 times its initial investment seven years ago. It is unbelievable returns by any measure.
Why is my sharing of this information relevant? Well, it is important for readers to understand how much CTOS has grown in valuation since 2014 and to recognise this is one of the most brilliant deals (in terms of PE) Creador has pulled off. They really pulled the rabbit out of the hat.
Coming back to retail investors, would you then be a greater fool helping to make a well-executed PE deal a bigger success and for its early investors to cash out?
Or are you jumping on the bandwagon of a next growth story that may last another 10 years? That is the crucial question you must ask yourself at this juncture beyond looking at just valuations or the reputation of the dealmaker.
The CEO of Creador did highlight that the firm intends to hold its stake for another five to 10 years. But this was back in 2014 when he envisaged a growth of 20% per annum and had targeted to grow SME clients to 15,000. It is now the seventh year since then and the SME clients today stand at 17,000 strong.
When investing, one must look at the long-term viability of the business including earnings visibility. When all the fanfare is over, it will all come down to earnings again. Until then, retail investors have every right to be prudent and not blindly follow the herd no matter how fantastic the story may be. Bottomline still matters.
The retail-centric brokerage house’s telegram channel mentioned above has almost 12,000 followers. I believe a majority of the followers are retail investors.
With the Securities Commission (SC) clamping down on unlicensed entities or individuals providing unauthorised investment advice, a licensed entity dishing out such advice on social media with little fundamental basis is no better than fake gurus or syndicate operated telegram channels.
The difference is one has the licence to do it recklessly, another doesn’t.
So, to help one make the best decision, evaluating a company from all angles (both quantitative and qualitative) is imperative rather than using a weak rationale that just because MR DIY was successful, so should CTOS.
Even though personally I am positive on CTOS, I believe retail investors must always do more homework to make an informed decision.
Ng Zhu Hann is the author of Once Upon A Time In Bursa. He is a lawyer and former chief strategist of a Fortune 500 Corporation. The views expressed here are his own.