Enhancing CTOS score

PETALING JAYA: CTOS Digital Bhd ’s successful appeal against the recent High Court verdict in a defamation case is expected enhance its appeal to investors.

According to market observers, the favourable outcome would likely help strengthen the credit reporting agency’s business, while reducing its business risk.

On Tuesday, CTOS announced that the Court of Appeal had unanimously overturned the High Court ruling on March 11 that said the group was not legally empowered to formulate credit scores and was not provisioned in the Credit Reporting Agencies Act 2010 (Act).

The Court of Appeal ruled there was no case of defamation, negligence, or breach of statutory duty against CTOS and that credit reporting agencies (CRAs) may formulate and publish credit scores.

Responding to the outcome, Kenanga Research said CTOS’ win in its appeal had dissipated an overhanging business risk to the group, adding the group would now able to operate accordingly.

Reverting to its previous call and discounted cash flow valuation pre-court case, the brokerage upgraded its recommendation on CTOS to “outperform” from “underperform” previously, with a target price of RM2 against RM1.15 previously.

“As its key business and operating risk normalises, we believe investors may return to appreciate its key merits, being a leading presence in credit reporting (commanding about 80% of domestic market share), synergistic gains to progressively materialise, and scalable operations for future regional penetration,” Kenanga Research explained.

RHB Research reiterated its “buy” call on CTOS, and raised its target price for the counter to RM1.84 from RM1.77 previously.

The brokerage noted the higher target price resulted from a lower risk premium, as the legality of credit scoring in CRA business is now settled, following the dismissal of the dangerous precedent set by the initial High Court ruling, which may have prevented a floodgate of claims against CTOS.

“This new development is a boost to CTOS and the CRA business as a whole, given the legality of formulating and publishing credit scores is no longer in doubt and such a verdict may deter similar claims in the future,” RHB Research explained.“We continue to favour CTOS as the leading credit reporting agency. It has a recession–proof business model and multiple growth avenues in the digitalisation age, which deliver solid earnings and cash flow generation,” it added.

Meanwhile, Hong Leong Investment Bank (HLIB) Research said while the Court of Appeal’s ruling was a positive for CTOS, the market had already priced in a victory ahead of the court outcome.

This was evidenced in the company’s share price recovering to around RM1.45 from a low of RM1.05.

“Accordingly, share price upside from hereon could be rather limited and we find its risk-reward profile to be balanced,” the brokerage explained.

HLIB Research kept its “hold” rating on CTOS, but the brokerage ascribed a higher target price of RM1.60 for the counter, compared to RM1.50 previously.

HLIB Research noted its new valuation implied 27 times the estimated forward earnings, which was above the global peers’ average of 22 times, but in line with the company’s five-year mean of 28 times.

“The premium is fair, in our view, backed by the underpenetrated Asean market, with high growth potential,” HLIB Research added.