Has the CTOS IPO lived up to expectations?

Celebrus Advisory's Edmund Yong says the market struggles to understand whether CTOS is a dividend stock or a growth stock.

CTOS Digital Bhd is arguably the most overhyped initial public offering (IPO) of the past decade.

With the stock down 14% from the first trading day, coupled with a low single-digit dividend yield, CTOS has not lived up to the expectations of many investors.

From the start, the RM1.2bil IPO that took place in July 2021 had been criticised for overpricing.

Regardless, the market chose to ignore CTOS’ high valuations, simply because 2021 was the time when the local market was flush with liquidity and yet saw a scarcity of mega IPOs.

Investors were hoping that private equity firm Creador, the promoter of CTOS, would deliver another massive success after MR DIY Group (M) Bhd.

Having debuted on the Main Market just eight months earlier, MR DIY saw its market capitalisation shooting up to over RM25bil as compared to RM10.98bil on the first day of trading.

Not only that, the stock entered the coveted FBM KLCI in less than eight months after its IPO.

The listing was so successful that it put the Tan brothers of MR DIY among the list of world’s billionaires by Forbes.

MR DIY performed strongly post-listing even though the public portion of the home improvement retailer’s IPO shares were barely oversubscribed earlier.

Creador owned 18% of MR DIY prior to the IPO.

With Creador also being the promoter of CTOS, the market had expected a bigger success story for the credit reporting agency (CRA).

There were stories about how some investors and staff even took personal loans to scoop up CTOS’ IPO shares.

Following the hype, the retail portion of the IPO was oversubscribed by 27.57 times, attracting RM1.38bil in value, the largest retail demand for an IPO since 2013.

Beyond retail investors, the CTOS IPO also saw an unprecedented interest from large funds.

In fact, the IPO garnered 23 cornerstone investors, including the Employees Provident Fund and Permodalan Nasional Bhd, constituting the largest number of institutional investors participating in a Malaysian IPO.

Creador and CTOS rode on the euphoria, thanks to the strong demand from investors even prior to the formal book building process.

CTOS doubled the offering of its equity or enlarged share base during the IPO to 50%, up from the initial plan of 25% which is the typical size of listings.

This was the first time in a long time that a large listing is selling so much of its equity in the market.

CTOS’ IPO shares were priced at RM1.10 apiece and the stock had a great showing in the first day of trading, closing at RM1.62 on July 19, 2021.

The share price continued its uptrend and touched an all-time high of RM2.10 on Oct 7, 2021.

From there, it was mostly downhill for the stock.

Amid the drop in share price, Creador has reduced its stake progressively in CTOS from 40% to the current level of 18.4%.

Creador is led by seasoned investor Brahmal Vasudevan. Creador-backed Tealive and Eco-Shop are planning for an IPO next year.

Investors who had bought the CTOS shares at the issue price of RM1.10 are still in the money, but for many others, it may not be the case.

Edmund Yong, managing partner of Celebrus Advisory, tells StarBizWeek that the market struggles to understand whether CTOS is a dividend stock or a growth stock.

“CTOS has always been known as a data services company until it was re-positioned as a digital financial technology (fintech) company upon listing.

“Fintech companies are typically seen as high-growth stocks,” he says.

The CTOS stock comes with a minimum 60% dividend payout policy.

However, the actual dividend yield is fairly low at 1.4%, based on Bloomberg data.

Yong, who formerly served as the general manager of CTOS, says that the company has largely remained as “credit information-based” rather than “analytics-driven”.

“In the United States and United Kingdom, the CRAs’ products are more value-added with greater analytics on a more micro-level compared to CTOS.

“Credit information is a fairly basic product which is buoyed by the growth of domestic consumer credit, with reliance on enterprise and retail adoption.

“As markets mature, it tends to get deflationary. Globally the credit information industry grows in the mid-to-low single digits,” he says.

This brings the question of whether CTOS deserves the relatively high valuation compared to its regional and global peers.

According to Bloomberg data, CTOS trades at a price-to-earnings (PE) ratio of 42.8 times.

In contrast, Singapore’s Credit Bureau Asia Ltd and London-listed Experian Plc have a PE of 23.2 times and 36 times, respectively. It is noteworthy that Equifax Inc, a leading CRA in the United States, trades at a PE of 58.5 times.

Prior to the IPO, CTOS defended the valuation by pointing out that CRAs in the United States and United Kingdom also have high valuations.

Yong, however, thinks that the CRAs in the United States and United Kingdom are not the appropriate comparison for CTOS.

“These are bigger markets than Malaysia and their CRAs are more innovative,” he adds.

Within the Malaysian-listed technology stocks universe, one could notice that the once hot valuations of many key technology stocks have been cooling down.

But, in the case of CTOS, its PE has remained stubbornly high. The good news is, contrary to CTOS’ dismal share price movement, the group has been performing well in terms of business and earnings growth.In fact, analysts have been positive on CTOS’ outlook.

UOB Kay Hian (UOBKH) Research analyst Jack Goh, however, says that the growth potential has been “adequately priced in”.

“While we anticipate CTOS to continue charting earnings growth driven by better services penetration, customer base expansion and synergies with associates, we maintain our view that these have been fairly priced in.

“We still reckon that CTOS is well-positioned to be the direct proxy to growing demand for Malaysia’s credit reporting industry, but current risk-reward appears neutral at this juncture,” he says in an earlier note.

UOBKH Research has a target price of RM1.52 for CTOS. The stock shed four sen to close at RM1.40 yesterday.

Goh foresees CTOS to chart strong revenue growth of 20% to 22% in 2023 to 2025, riding on more activations and income pulls for its various business analytic and credit assessment solutions.

He also notes that CTOS’ products and digital solutions are counter-cyclical in nature and widely utilised in assessing counterparty risk and creditworthiness during periods of economic expansion or recessions.

Furthermore, a big chunk of the company’s business is habitually recurring income, with over 75% from the Key Accounts segment.

Maybank Investment Bank (Maybank IB) Research is more bullish on CTOS, with the stock being one of its top picks in the Asean region.

The brokerage has set a target price of RM1.97, some 40% higher than the current level.

It prefers CTOS for its operating margins of over 35% across all three key segments, namely, Key Accounts, Commercial and Direct-to-Consumers.

This is bolstered by the fact that CTOS possesses a dominant share in the Malaysian credit reporting market.

CTOS also owns a 58% stake in RAM Holdings Bhd, Malaysia’s leading bond credit rating agency.

“CTOS continues to leverage on a partnership (US-based Fico) and the acquisition of Malaysia-based JurisTech and alternative credit scoring Coys in Indonesia and the Philippines.

“This is its strategy to grow its business in Asean where middle income demographics are rapidly expanding.

“CTOS’ gearing levels expect to remain manageable, about 14% in the financial year of 2023 (FY23) and 4% in 2024, before turning net cash in FY25.

Maybank IB Research says that price overhang from prior absence of tax incentive is likely to dissipate in coming months.

This is because CTOS has received a five-year extension of its pioneer status tax exemption until November 2026.

“CTOS will receive a lumpy RM28mil in writebacks in the fourth quarter of 2023 or the first quarter of 2024,” it says.

Looking ahead, Yong says that the market is still waiting for “innovative killer” products from CTOS.

“It’s not on the forefront of data tech for instance, using artificial intelligence in forecasting and forensics.

“It also needs to build sufficiently compelling proprietary datasets. The credit reporting model takes data from banks, processes it, and then sells it back to the banks.

“This doesn’t add much value and is either increasingly dis-intermediated by new delivery models, or disrupted by open banking initiatives (like e-CCRIS).

“What you see instead is a lot of inorganic growth through acquisitions.”