New products, solutions to drive CTOS growth

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KUALA LUMPUR: CTOS Digital Bhd is aiming for growth via new digital products and solutions, expanding into new sectors as well as acquisitions and investments in companies within Malaysia and the Asia-Pacific.

CTOS Digital, en route to list on the Main Market on July 19, is billed as Asean’s leading credit reporting agency (CRA).

Based on IDC Market Research (M) Sdn Bhd’s report dated June 15, 2021, the group has a 71.2% market share in Malaysia in terms of revenue for the financial year ended Dec 31, 2020 (FY20) through wholly-owned subsidiaries CTOS Data Systems and Basis.

Its 20%-owned associate Business Online Public Co Ltd (BOL) is the largest company information bureau in Thailand, with a 59% market share.

Two of the seven CRA certificates issued under the CRA Act in Malaysia are held by CTOS Data Systems and Basis.

Only three companies have been given access to Bank Negara’s central credit reference information system (CCRIS) and CTOS is one of them.

“We are really the largest CRA now in Asean, after an exciting journey over the last seven years with Creador Group (a Malaysian private equity group), ” group CEO Dennis Martin told StarBizWeek.

CTOS was set up in 1990 to provide services for banks, and subsequently grew to the digital CRA that it is today that covers financial institutions, small and medium enterprises (SMEs) and consumers.

In August 2014, Creador acquired a 70% stake (which was increased to 80% over the next four years) in CTOS.

Martin pointed out that CTOS is focused on growing the CRA industry in Malaysia by introducing a range of new products and solutions and opening up new segments.

“We don’t just sell credit records; we have tools that enable organisations to work in a digital environment. It wasn’t that long ago here in Malaysia, if you wanted to open a new bank account to get a loan, you had to physically go into a bank branch. Those days are gone.

“Organisations don’t need to physically interact with customers because they can do it all online, ” he said.

In the past three years, CTOS has launched new products consistently.

These include CTOS eKYC – a digital onboarding solution that provides banks and businesses with digital identity verification.

In 2020, it launched CTOS IDGuard – its proprietary fraud bureau that offers a data-sharing platform for its key accounts customers, particularly in the banking sector, to detect and prevent application fraud.

In 2021, the group launched CTOS Tenant Screening Report which allows landlords or property agents to screen prospective tenants.

“It amazes me that people would rent out a very valuable asset like a house to somebody whom they have no information on and not knowing if they are going to keep paying the rent, ” said Martin.

“We’re also looking for growth in new segments – automotive, real estate and insurance. We are in the early stage, so we still have a lot of work to do. These are totally new areas that would be considered traditional offshore, but just not here in Malaysia, ” he added.

The group also believes that there is potential to penetrate the insurance sector by applying its analytics to predict the associated risks of an insurance policy and the probabilities of insurance fraud.

According to the IDC Market Research report, collectively, the total addressable market of the automotive, real estate and insurance sectors is forecast to grow from RM25.1mil in 2021 to RM128.9mil by 2025, implying a 50.6% compounded annual growth rate (CAGR) during this period.

Martin noted that given its current market leadership in Malaysia, the group is best placed to benefit from this growth.

Overall, Malaysia’s credit reporting market size is slated to expand at a CAGR of 13.2% from 2021 to 2025, a much faster pace compared to Asean’s projected CAGR of 10.8%, and the single-digit 7.5% and 5.3% CAGR in the United States and United Kingdom, respectively.

The group also stands to benefit from the increased trend towards digital banking, led by banks and fintech companies.

Since FY19, the group has been busy with acquisitions and investments which were funded through bank borrowings.

In October 2020, the group took a 20% stake in BOL for RM91.9mil, followed by buying Basis in January 2021 for RM32mil upfront and an earn-out payment (potentially RM8mil payable no later than end-March 2023) that is based on a revenue target.

Basis is a Malaysian CRA that focuses on comprehensive commercial credit reports.

From FY18 to FY20, about 85% of Basis’ revenue was from international customers in industries such as insurance, services and credit reporting located in Asia-Pacific and Europe.

CTOS plans to use 70.5% of the listing proceeds from its public issue of RM220mil to pay its bank borrowings (RM157.9mil as at May 31, 2021), and set aside RM58.7mil or 26.7% for acquisitions to be identified within 36 months after listing.

The repayment of the loans is expected to benefit the group with interest savings of RM5.4mil per annum.

CTOS provides digital solutions across three customer segments – the key account segment, which includes leading financial institutions and corporates; the commercial segment, which includes SMEs; as well as the direct-to-consumer segment with 1.3 million individual customers.

For FY20, the commercial segment was the biggest revenue contributor (56.7%), followed by key accounts (33.7%), and direct-to-consumer (4.5%).

Martin says about 75% of CTOS’ revenue is recurring in nature, providing a stable income base for the group despite market uncertainties.

As at May 31, 2021, the group has 430 key accounts customers in Malaysia (including banks and corporates), as well as 17, 000 commercial customers including SMEs in industries such as financial services, telecommunications, wholesale and retail trade, manufacturing, construction, professional services and insurance.

“In terms of the opportunity in size, there are 900, 000 SMEs or more in Malaysia, of which there are easily 100, 000 SMEs that can use our services today.

“We have 17, 000 SMEs out of what I call the 100, 000 low hanging fruit, so there is a lot of scope for growth there. That’s why I have 150 sales people trying to reach out to these SMEs and say: ‘Hey look, here’s how we can help’, ” says Martin.

CTOS provides its direct-to-consumer customers with credit scores and detailed information including CCRIS information, directorships and business interests, litigation cases and trade references.

The group has 1.3 million users registered for a CTOS ID account, which allows users to access and purchase their CTOS Consumer Scores and credit information.

Its databases has profiles of 15 million consumers and eight million companies and businesses.

For FY18 to FY20, the group posted a 12.8% CAGR in revenue from RM110.5mil to RM140.5mil, while profit after tax after minority interest (patami) grew at a CAGR of 15% from RM29.7mil to RM39.2mil.

Its return on equity has consistently been at least 39% from FY18 to FY20.

For FY20, revenue grew 8.8% year-on-year to RM140.5mil (from RM129.1mil a year earlier).

For its first quarter ended March 31, 2021, CTOS recorded a 24.1% year-on-year jump in revenue to RM42.3mil, while normalised patami for the quarter grew 73% to RM16.4mil.

The group said the reintroduction of movement restrictions in 2021 has not materially impacted its business.

Regarding business risks, in its initial public offer (IPO) prospectus, CTOS pointed out that it enjoys pioneer status tax relief (effective tax rate of 5.8% for FY20), which is significantly lower than the statutory tax rate of 24% in Malaysia.

The group believes the pioneer status will be renewed this year, and it plans to seek the renewal from the Malaysia Digital Economy Corp in the third quarter of 2021, for five years until November 2026.

Malaysia’s largest IPO in 2021

CTOS’ listing is expected to raise RM1.2bil at the offer price of RM1.10 per share.

This translates into a price-to-earnings multiple of 61.8 times based on FY20’s earnings per share (EPS) of 1.78 sen, and the enlarged issued share capital of 2.2 billion shares upon listing.

The IPO exercise entails the public issue of 200 million new shares and an offer-for-sale allocation of 900 million existing shares, representing 50% of the enlarged issued share capital.

Upon listing, based on the offer price, the total market capitalisation of CTOS would be RM2.4bil.

Proceeds from the offer for sale of RM990mil will accrue entirely to the selling shareholders.

Regarding its dividend policy, the group targets a payout ratio of 60% of patami.

It is Malaysia’s largest IPO in 2021, and has attracted the largest number of institutional investors.

A total of 23 cornerstone investors participated in the IPO, including the Employees Provident Fund Board, Permodalan Nasional Bhd, Aberdeen Standard Investment, AIA, Eastspring Investments, FIL Investment Management and JP Morgan Asset Management.

Applications for CTOS Digital’s IPO opened on June 30 and will close on July 6.

Maybank Investment Bank (Maybank IB) and RHB Investment Bank (RHB IB) are joint principal advisers of the IPO exercise, as well as joint bookrunners, joint managing underwriters and joint underwriters with AmInvestment Bank.

Maybank IB and RHB IB are joint global coordinators and joint bookrunners with Credit Suisse Securities (M) Sdn Bhd and Credit Suisse (Singapore) Ltd.



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