CTOS Digital Berhad is a credit rating agency (CRAs) incorporated in Malaysia on 17 July 2014. The Company is going for listing in Main Market on 19 July 2021. Based on its IPO prospectus , it will be listed at RM1.10 per share.
When it comes to credit rating for loan application purpose, many will think it is that CTOS score. But this company is more than that. In fact, the CTOS report you get is just a small part of the company’s business.
So, what then does the company do? Here’s 6 key insights about CTOS Digital Berhad that you need to know before investing:
#1: BUSINESS OVERVIEW
CTOS Digital serves 3 types of customers; 1) Key Account; 2) Commercials; and 3) Direct-to-Consumer. The latter is for individuals like you and me. The Key Account and Commercials, on the other hand, is for business organisations. For example, banks and SMEs in various industries. This is where a large part of the company’s revenue come from.
As of 31 December 2020, approx. 60% of the company’s total revenue comes from Commercials. This follows by “Key Accounts” which contributed approx. 35%. The smallest segment by customer is its Direct-to-Consumer which accounts for only 5% of total revenue.
As of 31 May 2021, the company has about 430 “Key Account” and 17,000 “Commercial” customers. So, I’ll be focusing on this 2 largest revenue generator here.
#2: RECURRING BUSINESS MODEL
CTOS Digital basically provides credit management solutions to both its “Key Account” and “Commercials” customers. As you know when it comes to payment, most businesses deal in credit. This means there are fix payment terms for customers to make their payment – e.g., 30 days. As such, you need to do some analysis on the customers’ credit background before giving credit terms. This is where CTOS comes in handy.
Below is the full suite of CTOS solutions from acquiring new customers to collection of payment:
By using the above solutions, a company is able to manage their customers more effectively. Those with less creditworthy, a company can adjust its pricing strategy. For example, higher upfront deposit for customers with poor payment records.
The company charges its customers either one-time fee, transactional basis or subscription-based. The above picture with ★ symbol is services which CTOS Digital charges a subscription or transactional fee. Below is how the company charge its customer specifically:
“Key Account” Customers
These are mainly banks. The company charges fee based on the tailored solutions provided. As such, there will be fixed-term contracts, typically 1 to 3 years. The company also charges additional fee from set-up and maintenance of the digital solution.
“Commercial” Customers
These are SMEs. The company charges subscription fees for access to its digital platform – CTOS Credit Manager. Of course, within this platform there are “add-on” features that customers can request. There’ll be additional subscription fee from this.
According to the management, approx. 75% of revenue from its “Key Account” customers are recurring in nature. Not surprising as most of the “Key Account” customers are banks. They need these services for their clients’ loan application assessment.
#3: DOMINANT POSITION IN MALAYSIA
Now that you understand how CTOS Digital make money, what makes it attractive? For me, it’s the recurring revenue model and how dominant the company is in Malaysia. According to IMR Report , there are limited number of CRAs that come close to the company. Below is the comparison of CTOS Digital against its peers in terms of the digital solution provided:
As you can see, the closest competitor of CTOS Digital is Experian. But in July 2019, the company acquires 26% stakes in Experian Malaysia. This means if Experian make money, CTOS Digital will take 26% profit from it. Either way, it is a win for the company.
CTOS Digital in year 2020 has approx. 71.2% market share by revenue in Malaysia according to IMR Report . Having a dominant position is good because then you’ll have pricing power. For the year from 2018 to 2020, the company’s gross profit margin has been above 80%. Its net profit margin over the past 3 years is above 25%.
#4: HIGH BARRIERS OF ENTRY
Everyone knows that having a dominant position now doesn’t mean it’ll stay that way. You need some competitor advantage to maintain your market share. For CTOS Digital, it is the regulations, security, databases & branding that give them the advantage.
Regulations
Credit reporting industry is highly regulated by CRA Registrar in Malaysia as well as BNM. Complying to these regulations is not easy and often costs money. One of the major cost would be compliance audit fee.
Security
As you know, CRAs deals with highly confidential information. They need to maintain their database periodically to prevent any cyber breaches. To build a strong cybersecurity infrastructure is another major cost to incur.
Database
CRAs that has large database of credit information can easily offer more value added information. For example, providing information about how a client’s credit score fair against its industry peers. New entrants without a large database may not be able to do this.
Branding
Mention about credit score, the first thing that comes to your mind is CTOS. This has been a trusted CRA for many people in Malaysia. Its going to take time for new entrants to establish this brand recognition.
All the above make CTOS Digital’s market share seems sustainable for many years to come.
#5: GROWTH THROUGH ACQUISITION
With such dominant position in Malaysia, can the company still grow? According to IMR Report , the credit reporting industry is expected to grow at CAGR of 13.2% between 2021 and 2025. But this is the overall industry.
At company-level, CTOS Digital can grow by either increasing its subscription fee or through acquisition. As mentioned, new entrants cannot just penetrate the market and start earning money. There are regulations to follow. For CTOS Digital to penetrate into new market like Thailand or other ASEAN countries, best is through acquisition.
This is because CRAs in these countries already have the infrastructure that complies to the regulations. CTOS Digital does not need to start from scratch. This explains why they acquire 20% stake in BOL, which has a similar business, in October 2020.
However, there are risk involved. For me, it is the acquisition price. There is a possibility that company may overpay for future acquisitions.
#6: UTILISATION OF PROCEEDS
The company is expected to raise over RM220 mil out of its public issue. According to its IPO prospectus , 70.5% of these proceeds will be for repayment of borrowings. About 26.7% is for acquisitions purpose. My guess is pairing down the borrowing so that they have higher loan capacity.
This seems understandable for reason stated above. That’s why my concern is overpayment for acquisition. Any investment that is overpaid is bad investment, in my opinion.
MY INSIGHTS
This company can be a dividend-growth stock. According to its IPO prospectus , the management has set a dividend policy of 60% payout ratio. With its recurring business model and dominant position, I think their future dividend payment is sustainable.
However, the IPO price of RM1.10 is at PE of 61.8 times based on its 2020 earnings. Comparing with its peers below, it seems at the high side:
| Peers | PE Ratio (As of 2 July 2021) |
|---|---|
| Experian Plc, UK | 45.0x |
| FICO, US | 54.2x |
| GB Group Plc, UK | 62.8x |
| Credit Bureau Asia Ltd, Singapore | 39.0x |
| Business Online Plc, Thailand | 38.1x |
| Average PE Ratio | 47.8x |
Nevertheless, it is a good business. If you decided to invest in it, do read the IPO prospectus and understand more. The above is just my take about this company, not a recommendation to buy.
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