KUALA LUMPUR (March 12): Shares in CTOS Digital Bhd fell as much as 27% on Tuesday, wiping out all gains since its listing, after a High Court decision ruled that credit reporting agencies are not legally empowered to formulate credit scores.
The counter declined to a new record low of RM1.06, near its initial public offering price of RM1.10, in high trading volume on Bursa Malaysia. At noon, the stock was trading at RM1.14, down 21% and set for its steepest decline in a single day on record since its debut in July 2021, after 117 million shares changed hands. At least one analyst downgraded the stock.
“Business risks appear to deepen with likely immediate repercussions being a challenge to its business model, and with similar legal suits arising in the near term,” Kenanga Investment Bank said. The research house cut its rating to 'underperform', equivalent to a 'sell' call, and lowered its target price to RM1.15.
CTOS’s legal troubles escalated after High Court judge Datuk Akhtar Tahir ordered CTOS Data Systems Sdn Bhd (CDS), a wholly owned unit of CTOS, to pay businesswoman Suriati Mohd Yusuf RM200,000, together with RM50,000 in costs, for an inaccurate negative credit rating.
Akhtar found that CDS overstepped its statutory functions under the Credit Reporting Agencies Act 2010 in formulating a credit score for Suriati, when it was merely to be a database of credit information for its subscribers. CTOS said it would appeal against the decision.
CTOS is likely to suffer reputational risk from this ruling, as the court’s findings suggest weakness in internal controls, Macquarie said in a note to clients.
“As a self-proclaimed technology company that relies heavily on the integrity of its database, this judgement casts CTOS in a poor light,” Macquarie said.
The court found that CDS was alerted of the inaccurate information but chose to ignore it, according to a court document on the eJudgement Management System sighted by The Edge.
“Errors are bound to occur in such a large database, especially one populated by various third parties,” Macquarie noted. “While the extent of the inaccuracies is not known, it may be compounded by CTOS' failure to address said complaint of data inaccuracy.”
In the meantime, CTOS is expected to operate as usual, Kenanga said. CTOS doesn’t disclose the proportion of its revenue from its credit scoring products or credit information services, though non-credit-related streams likely make up only about 10% of total revenue, the research house added.
On its part, CTOS acknowledged the High Court judge’s decision in favour of Suriati, but noted that its unit had lodged a notice of appeal to the Court of Appeal.
There were "no material losses anticipated as a result of this matter and no provisions shall be required”, CTOS said in a terse exchange filing on Monday.