Maintain BUY
Following the analyst briefing, we remain upbeat on CTOS’ earnings
trajectory in the coming quarters ahead. The subsiding Omicron could
translate to accelerating new activations for its Commercial segment,
while ARPU across its segments may trend better on VAS upselling.
Expectation on the final decision of its pioneer tax status application,
however, has been pushed back to 2H22. We maintain our earnings
forecast and MYR2.17 TP, based on 2.3x PEG multiple.
Additional commentary on 1Q22 performance
The good: 1) Revenue from Key Account segment grew by 23% YoY in
1Q22 due to higher ticket size from higher take-up rate on its VAS, 2)
D2C revenue grew by 29% YoY despite the introduction of eCCRIS in Feb,
reflecting strong proposition of CTOS’ credit solutions, and 3) EBITDA
margin improved 1.1ppt sequentially to 39.4% due to operating leverage,
partially offsetting the higher staff and IT-support cost. The bad: 1)
Revenue performance from Commercial – MY was the weakest at just +3%
YoY due to subdued new account activation as Omicron spiked in Jan and
Feb, but recovered noticeably towards the end of 1Q22.
Update on its tax relief situation
Management clarified that there are two stages to its tax relief situation.
Under the Grandfathering and Transitional Guidelines, the tax relief for
the first 5-year period was cut short, resulting in an incremental RM4.1m
tax incurred in 2H21. Management has applied for the relief during this
transitional period, and anticipates a positive outcome by May 2022. The
latter part is the second 5-year pioneer status, in which the application
is pending the final approval by MDEC/MOF. Approval would grant a
further RM4.3m in tax write-backs as at end-1Q22 and normalisation in
the tax rate thereafter. Despite the optimism, the management expects
the final outcome to take up to 6 months to materialise. We maintain
our 1% effective tax rate assumption for FY22E.
Key growth drivers intact
Management remained upbeat on its business prospects, with key growth
drivers being 1) higher take-up rate on its VAS across both Key Account
and Commercial customers, improving upward ARPU trend, 2) tapping on
its associates to cross-sell its services, 3) higher financial awareness
among the retail market that leads to higher conversion to paying
accounts, and 4) new growth avenue from proliferation of digital
moneylenders and digital banks. At 41.1x FY22E, it is trading at a slight
discount to its 9-month average of 43x.