This article first appeared in The Edge Malaysia Weekly on May 10, 2021 - May 16, 2021

THE upcoming initial public offering (IPO) of credit information company CTOS Digital Sdn Bhd (formerly known as CTOS Holdings Sdn Bhd) has caught the interest of a number of institutional funds, including insurance outfit Etiqa International Holdings Sdn Bhd, which is a wholly-owned unit of Malayan Banking Bhd; Kenanga Investment Bank Bhd and Aberdeen Standard Investments.

When asked if they were looking at investing in CTOS, executives at these companies declined to comment on record, citing confidentiality in negotiations.

One high-level executive who spoke on condition of anonymity says, “Of course we are interested (in CTOS). ”

Asked about the interest expressed by these institutional investors, CTOS CEO Dennis Martin declines to comment, citing regulatory directives. He points out that the firm is currently undertaking a virtual roadshow for the IPO.

“The one time in my life I can travel the world on Brahmal’s (Vasudevan) dime … I’m stuck here,” Martin says, laughing.

Brahmal is the founder and CEO of ­Creador, a private equity firm that has been a major shareholder of CTOS since 2014.

“When Creador invested in 2014, CTOS was primarily a single-product company — it just sold credit information. So, we’ve evolved from just selling data to now having solutions … Data will always be the backbone of what we do and data is important to us. But then, we are also enabling a lot more through our digital solutions,” Martin adds.

CTOS, he explains, has also developed strategic partnerships with the global leader for credit scores, FICO, and provides digital solutions to about 17,000 commercial customers, including small and medium enterprises, primarily in Malaysia. Its end-of-year number of subscribers experienced a compound annual growth rate (CAGR) of 20% from 2018 to 2020.

In addition, CTOS provides digital solutions to its key accounts customers in a variety of industries, which include financial institutions, telecommunications companies, insurance companies and fintech firms such as P2P lenders and e-commerce platforms.

Aside from its credit reporting service, CTOS also provides digital solutions, which include eKYC, CAD (CTOS Application & Decisioning), fraud monitoring and credit portfolio analytics and insights.

Today, there are about 1.3 million registered users for CTOS ID, which enables them to access their information and sign up for additional consumer offerings.

In terms of database, CTOS has the profiles of approximately 15 million consumers and eight million companies and businesses.

The investing community will be watching closely to see if Creador will be able to fetch a high premium valuation for CTOS, following its success with the flotation of retail outfit Mr DIY Group (M) Bhd, which was valued at a trailing price-earnings (PE) ratio of more than 30 times.

In October last year, Creador-backed Mr DIY Group undertook Malaysia’s largest IPO since 2017, with a market capitalisation of RM10 billion, and raised about RM1.5 billion from both institutional and retail investors.

From its listing price of RM1.60 five months ago, Mr DIY’s stock has more than doubled to RM4 on May 7.

Whether CTOS will be as successful remains to be seen. In a March report, The Edge quoted a source familiar with CTOS’ IPO plans as saying that a potential valuation of over RM2 billion was being looked at for CTOS.

Based on an enlarged issued share capital of 2.2 billion shares, as noted in CTOS’ draft prospectus, and the potential valuation of over RM2 billion, as cited by the source, CTOS’ IPO price could be from 90 sen to over RM1.

On this, Martin is again tight-lipped, citing regulatory concerns.

A quick check on UK-listed credit score company Experian plc shows that its shares were trading at a PE of 53.7 times on May 7. Meanwhile, American consumer credit reporting agency (CRA) Equifax is trading at a PE of 48 times.

It should be noted that data shows 2019 credit bureau coverage of the UK and US population was 100% while in Malaysia it was about 77%. Credit reporting revenue per capita stood at RM6.86 in Malaysia in 2020, about 12 times smaller than the US’ RM83.

According to CTOS’ draft IPO prospectus posted on the Securities Commission Malaysia website, the listing exercise will involve an offer of up to 1.1 billion shares at a price to be revealed later.

Of the 1.1 billion shares, 900 million will come from existing shareholders, while the remaining 200 million will be made available via the issuance of new shares.

Of the 900 million shares up for sale from existing shareholders, Creador’s unit Inodes will offer 720 million shares, while 81 million shares will come from each of the co-founders Chung Tze Keong and Chung Tze Wen, and 18 million shares from June Ng.

This means about 65.5% of the IPO proceeds will go into promoter Inodes’ pocket.

Inodes is 82.6%-owned by Creador. The remaining shares are held by Siguler Guff BRIC and Siguler Guff FM — managed by Siguler Guff Advisers LLC — and MIT Investments.

Martin says proceeds from the IPO will be used to repay CTOS’ borrowings and also for future acquisitions. He adds that the company aims to land some new acquisitions for growth within three years.

A look at CTOS’ numbers shows its borrowings jumped more than four times in the financial year prior to this listing. Its total borrowings rose 379% to RM132.3 million in FY2020 from RM27.6 million a year earlier. Its gearing ratio increased from 0.3 times as at Dec 31, 2019 to 1.1 times as at Dec 31, 2020.

Martin says CTOS had borrowed to fund the group’s acquisitions. In the last three financial years, significant acquisitions included a 26% equity interest in Experian, a Malaysian CRA that is majority-owned by the UK’s Experian; and a 20% equity interest in Business Online Public Co Ltd (BOL), a business information service provider and developer in Thailand, in October 2020. Apart from these acquisitions, CTOS also acquired the entire equity interest in Basis, a Malaysian CRA, in January this year.

Martin says the bulk of the IPO proceeds will be used to repay CTOS’ borrowings. The proceeds will also be used for future acquisitions, which he says he cannot elaborate on as it is still too early.

In 2020, CTOS had a market share in terms of revenue of 71.2% while its associate, Experian, the second largest CRA in Malaysia, had an estimated market share of 17.5%, Martin highlights.

He adds that another associate, BOL, is the largest commercial credit bureau in Thailand, with an estimated market share of 59%, and is a publicly traded company.

CTOS had a revenue CAGR of 12.8% between 2018 and 2020, and registered top line of RM140.5 million in FY2020.

Martin notes that more than 75% of revenue is recurring, with the remainder being one-time transaction-based revenue.

For FY2020, CTOS saw its net profit fall 2% to RM40.3 million from RM41.2 million a year earlier.

Martin explains that the drop in profit was a result of the loss in investment in CIBI in the Philippines. “Our entire 51% in CIBI will be carved out before CTOS lists as CIBI is loss-making and requires more investment at this moment, and will be a distraction to CTOS and its management. CTOS has the option to buy back CIBI at a later stage.”

On technology and data security, Martin says CTOS’ IT systems adhere to the strictest requirements.

“We are audited by the Ministry of Finance and Bank Negara. We are compliant and our technology matches the IT requirements of banks. We invest heavily in tech security. In the last 30 years, we haven’t had a breach.”

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