CTOS: Digital Solutions Provider Exceeds Profit Expectations on Robust Cost Management
| Key Information | |
|---|---|
| Investment Bank | TA SECURITIES |
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation | |
A leading digital solutions provider met expectations for its 9M25 core PATAMI, despite an 18% year-on-year decline to MYR61.9 million. The performance aligns with the expectation of a stronger fourth quarter, which is typically driven by higher billings from associates and elevated key account volumes.
Performance Overview
The softer year-to-date performance was primarily attributed to slower growth momentum, underperforming investments, and an increased cost base. The Gross Profit Margin (GPM) consequently contracted to 68% from 72%, a result of a higher mix of lower-margin international business and cost escalation stemming from earlier product investments. However, the bottom line saw partial mitigation from a robust 3.9% year-on-year increase in associate contributions, primarily from Juris Technologies and Business Online Public Company.
Operational Dynamics and Third-Quarter Rebound
The third quarter demonstrated a significant turnaround, with core PATAMI rising 13.7% quarter-on-quarter. This improvement was driven by stronger traction in identity and fraud solutions, coupled with effective cost optimisation measures. Key accounts exhibited resilience, rebounding by 6% year-on-year and 3% quarter-on-quarter to MYR30.3 million, supported by solid recurring revenue and uptake of new fraud-related products. While commercial sales were softer due to slower bulk orders, recovery is anticipated in the fourth quarter. International business grew 7% year-on-year and 11% quarter-on-quarter, fueled by new clients and business wins in the Philippines. The Direct-to-Consumer (D2C) segment remained strong, growing 50% year-on-year and 4% quarter-on-quarter, adding 200,000 new users and reaching 4.8 million, underscored by increasing demand for credit monitoring products.
Future Outlook and Investment View
The investment bank anticipates a stronger fourth-quarter performance, buoyed by strategic product rollouts across commercial and key account segments, tangible benefits from cost optimisation initiatives, and improved associate earnings. While FY25 is projected to be a “wash-out year” in terms of overall growth, the company is expected to resume robust growth in FY26, underpinned by ongoing product expansion and operating efficiency initiatives.
The bank maintains a “BUY” recommendation for the stock, with a target price of RM0.25, representing a 25.0% upside from the last traded price of RM00.20. It is believed that most negative factors are already priced in, setting the stage for the share price to rebound as the company executes its multi-pronged growth strategies and restores earnings momentum in the coming year. Key downside risks include changes in the regulatory environment, slower-than-expected topline growth, and data security breaches.
