KUALA LUMPUR: CTOS Digital Bhd
's proposal to acquire a bigger stake in RAM Holdings Bhd is a positive move as it is attractively priced and accretive in nature, said Hong Leong Investment Bank (HLIB) research.
CTOS yesterday announced its plan to buy 15.7% and 0.7% RAM stakes belonging to Dragonline Splutions and Deutsche Bank for RM44.mil and RM2.3mil cash respectively, translating to RM28.50 a share.
Following the acquisition, CTOS will become a majority shareholder with an increased stake of 55.6% from 39.1% previously.
HLIB noted the proposal and price tag came as no surprise given CTOS's earlier communication to the investment fraternity.
"The deal is attractive, in our opinion, seeing that RAM is priced at 20.4x P/E, a 19% discount to other listed global credit rating agencies average of 25.1x.
"Besides, it is an accretive acquisition (looking at CTOS’ higher valuation of 44.9x) despite financed by loans (assuming a 4% cost of debt)," said HLIB.
It added that RAM has the capacity to dish out special dividends since it could monetise investment properties worth RM67mil and has cash equivalent coffers of RM131mil, for a combined value of RM19.80 a share.
"If it materialises, it will help CTOS to offset some of its acquisition cost," it said.
According to HLIB, it has not consolidated RAM's profit into its financial model yet although it said RAM could add 4% to 5% to CTOS's FY23 earnings, based on a 55.6% stake and 4% debt cost.
Pending completion of the deal, HLIB maintained its "buy" recommendation and target price of RM1.70 on CTOS.
"The premium is fair given its bright outlook and more robust profit growth profile (4ppt higher vs GPA), backed by the underpenetrated ASEAN market.
"Moreover, we like CTOS for its leadership position, strong economic moat, and highly scalable business model.
"Hence, we view that the YTD share price pullback as a good opportunity to accumulate the stock," it added.
