CTOS’ recent sell-off overdone, but court ruling still poses challenge to group’s business model — analysts

• The High Court last week decided in favour of a businesswoman, Suriati Mohd Yusuf, in a defamation case she brought against CTOS’ wholly owned unit CTOS Data Systems Sdn Bhd (CDS).
• The court ruled that CDS had overstepped its statutory functions under the Credit Reporting Agencies Act 2010 (CRA) in formulating a credit score as the company was merely a database of credit information for its subscribers.

KUALA LUMPUR (March 13): CTOS Digital Bhd’s share price rebounded on Wednesday’s morning after analysts said the recent sell-off was overdone, following the management’s positive stance that the continuity of its operations was not at risk.

This follows the High Court’s recent ruling against a CTOS unit in a negligence and breach of fiduciary duty suit.

The counter increased by 4% to a high of RM1.30 during morning trade before paring gains to RM1.24 as of 10.26am, with some 22.13 million shares changing hands.

Following the recent briefing with CTOS’ management, RHB Research opined that the stock’s share price sell-down is overdone. The research house sees this as an opportunity to invest in a top credit reporting agency (CRA) with a recession-proof business and growth avenues in the digitalisation age.

On the other hand, Maybank Investment Bank Bhd assessed that regulatory risks to CTOS' business are currently contained, leading the research firm to upgrade its recommendation from “hold” to “buy”.

Seven analysts have assigned a “buy” recommendation for CTOS, three suggested “hold”, and one rated “sell”. The 12-month median target price for the stock stood at RM1.69, Bloomberg data showed.

The High Court last week decided in favour of a businesswoman, Suriati Mohd Yusuf, who sued CTOS’ wholly owned unit CTOS Data Systems Sdn Bhd (CDS) for negligence and breach of fiduciary duty.

The court ruled that CDS had overstepped its statutory functions under the Credit Reporting Agencies Act 2010 (CRA) in formulating a credit score as the company was merely a database of credit information for its subscribers.

Judge Datuk Akhtar Tahir, in his judgement, said that based on evidence that CDS was alerted of the inaccurate information but chose to ignore it, the credit reporting agency is deemed to have breached its duty of care owed to Suriati. He ordered CDS to pay her RM200,000 together with RM50,000 in costs.

Kenanga maintains 'underperform'

Kenanga Investment Bank noted that the court’s interpretation still poses a challenge to CTOS’ business model until it is overturned by a “higher court”, which could take up to three to six months.

“While there could be merit to the group’s legitimacy in offering key credit scoring solutions, we believe the elephant in the room still stands, ie the court’s interpretation that poses a challenge to CTOS’s business model,” said Kenanga, which maintained its “underperform” call for the stock.

Hong Leong Investment Bank estimated that if CTOS were to discontinue its credit scoring business, this could impact the company's bottomline negatively by 30%.

For the full financial year ended Dec 31, 2023 (FY2023), CTOS' net profit surged 65.05% to RM118.37 million from RM71.72 million as revenue climbed 34.22% to RM261.44 million from RM194.78 million recorded in FY2022.

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