CTOS downgraded after court claims its credit scoring as not legal

KUCHING: The research arm of Kenanga Investment Bank Bhd (Kenanga Research) has downgraded their call on CTOS Digital Bhd (CTOS) to underperform following a recent court ruling that claimed that the credit reporting agency is not legally empowered to formulate credit scores.

To recap, the High Court ruled on March 11 that CTOS would be liable to compensate RM200,000 in damages and RM50,000 in costs to a businesswoman who experienced losses arising from an inaccurate credit rating from the agency.

During the ruling, the High Court claimed that CTOS’ credit scoring facilities have been performed above their legal capacity as there is no provision in the Credit Reporting Agencies Act 2010 (CRAA) that empowers the agency to formulate a credit score for its customer.

The court stated that legally, CTOS is only allowed to be a repository of credit information for its subscribers.

In a company update, Kenanga Research guided that they were wary that the development would serve as a challenge to CTOS’ business model and act as a precedent for other similar suits in the future.

“Business risks appear to deepen with likely immediate repercussions being a challenge to its business model and similar legal suits arising in the nearterm,” they said.

While CTOS does not disclose the proportion of its revenue that is attributed directly from its credit scoring products or credit information services, Kenanga Research opines that CTOS’ credit-related streams likely make up circa 90 per cent of its total revenue.

Consequently, the research arm has decided to attach a higher risk premium to the group’s valuation which has prompted them to lower their discounted cash flow driven target price from RM2.00 to RM1.15.

“From our previous weighted average cost of capital (WACC) of 6 per cent and TG of 3.5 per cent, we opted to raise our WACC to 7 per cent and lower our TG to 0 per cent in lieu of a higher risk premium attached to the stock.”

“Meanwhile, we also lower our ESG rating to 3-star from 4-star which strips out our previous 5 per cent ESG premium on the stock,” they added.

On a separate note, CTOS had announced via a filing on Bursa Malaysia on March 12 that it has filed for an appeal on this decision. The credit agency is expected to operate as usual until a decision on the appeal materialises.