Highlights

TA Sector Research

Author: sectoranalyst   |   Latest post: Thu, 17 Dec 2020, 8:52 AM

 

N2N Connect Berhad - Staying Sanguine on Performance in 2021

Author: sectoranalyst   |  Publish date: Thu, 17 Dec 2020, 8:52 AM


Going into 2021, we remain sanguine on N2N’s performance as we expect its contributions from Malaysia to remain robust. This is in anticipation for trading activity to remain strong on the back of sustained interest from the new wave of retail investors, ample liquidity amid the low interest rate environment, and bouts of volatility amid prevailing risks from the COVID19 pandemic, global and local economic recovery, and domestic politics. Meanwhile, we continue to view near-to-medium catalysts for N2N from the Asia Trading Hub, back office system replacement opportunities in Malaysia, and mergers and acquisitions. In all, we maintain our Buy recommendation on N2N with an unchanged TP of RM1.15 based on 28.0x CY21 EPS which is closely in line with the stock’s 3-year mean.

More Than Resilient to COVID-19 Headwinds

To recap, N2N has turned out to be more than resilient to COVID-19 headwinds. Its 9MFY20 revenue grew 9.5% to RM86.4mn while core net profit jumped 61.8% to RM18.0mn largely thanks to the surge in trading activity in Malaysia (~42% of revenue), fuelled by increased retail participation. And notably in 3QFY20, with trading activity hitting all-time highs, the group also achieved record high results with revenue and core net profit respectively at RM31.6mn (+10.5% QoQ, +24.0% YoY) and RM8.4mn (+40.4% QoQ, +80.6% YoY).

Essentially, the group has benefitted from higher trading activity in Malaysia as the revenue model here comprises of: i) variable transaction-based fees, which are dependent on the value and volume of trades matched via its trading platform, and ii) fixed monthly subscription fees for managed network services.

We Expect Contributions from Malaysia to Remain Robust in 2021…

Going into 2021, we remain sanguine on N2N’s performance as we expect its contributions from Malaysia to remain robust. Acknowledging that a repeat of the momentous trading activity seen in 3QFY20 is unlikely following the expiry of the 6-month loan repayment moratorium at end-September 2020 and the easing of the movement control order, we expect it to remain higher versus pre-COVID-19 levels in the foreseeable term.

We believe trading activity will remain strong on the back of sustained interest from the new wave of retail investors, ample liquidity amid the low interest rate environment, and bouts of volatility amid prevailing risks from the COVID-19 pandemic, global and local economic recovery, and domestic politics. Indeed, trading activity on the local bourse thus far in 4QFY20 is observed to remain stronger YoY with both trading volume and value in October and November 2020 >100% YoY (see Figure 1 and Figure 2).

…While That from Hong Kong to Remain Resilient

Unlike Malaysia, N2N’s other key market Hong Kong (~48% of revenue) has not benefitted from the surge in trading activity during the year because it operates purely under a license and rental model. Nevertheless, we expect performance there to remain resilient, supported by the increased opportunities for the provision of back-office solutions.

Management highlighted that with brokerages in Hong Kong seen to rationalise costs amid the country’s political unrest and COVID-19 headwinds, the group had seized the opportunity to cross-sell to them its back-office solutions which offers an avenue for savings over costlier manual processes. And of note, the increased contribution from back-office solutions has also helped N2N to cushion lower terminal subscriptions as brokerages have also been scaling back on branches to reduce costs.

Catalyst from Asia Trading Hub, BOS Replacement Opportunities, & M&A

Meanwhile, we continue to view near-to-medium catalysts for N2N from the Asia Trading Hub (ATH), back office system (BOS) replacement opportunities in Malaysia, and mergers and acquisitions.

Recall that the formation of the ATH is envisioned to make cross border more cost effective and seamless for all, especially the retail market. Thus, we expect N2N to benefit over time from: i) increased transaction-based fees, and ii) market share gains as non-panel brokerages switch over to its platform to benefit from the ATH’s capabilities. According to management, the group is also one step closer towards operationalising the ATH pending the appointment of an anchor broker which is required to function as a conduit between participating brokers.

For BOS replacement opportunities in Malaysia, management opines that it has not faded despite the long wait. This is because many brokerages are still on legacy systems which are costly to maintain and striving to keep up with evolving business demands. Moreover, we note that the group has also been actively participating in request for proposal from various parties including the stockbroking association.

As for mergers and acquisitions, management reiterated its interest in expanding N2N’s brokerage network in existing and newer markets across Asia via the inorganic route to accelerate growth. And we expect its ambitions to be well supported by its strong balance sheet with a net cash position of RM121.3mn as at end-3QFY20.

Impact

We make no changes to our earnings forecast.

Valuation & Recommendation

In all, we maintain our Buy recommendation on N2N with an unchanged TP of RM1.15 based on 28.0x CY21 EPS, which is in closely in line with the stock’s 3- year mean. We continue to like the group for its niche as the largest financial information and trading platform provider in Asia, prospects from the ATH, BOS replacement opportunities in Malaysia, and strong balance sheet which would support M&A ambitions. Key downside risks include an unprecedented slowdown in trading activity, and lower than expected demand for system upgrade and implementation.

Besides, note the group is also in the midst of seeking approval from the relevant authorities for the transfer of its listing to the Main Market of Bursa Malaysia which would bode well for the stock’s marketability.

Source: TA Research - 17 Dec 2020

Labels: N2N
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N2N Connect Berhad - Record Quarterly Results on Strong Trading Activity

Author: sectoranalyst   |  Publish date: Thu, 26 Nov 2020, 5:49 PM


Review

  • N2N’s 9MFY20 core net profit of RM18.0mn (+61.8%) came above our fullyear estimates at 82.8% due to stronger-than-expected contributions from transaction-based fees in 3QFY20 alongside the momentous rise in trading activities on Malaysia’s bourse (i.e., Bursa Malaysia).
  • YoY. 9MFY20’s core net profit surged 61.8% to RM18.0mn, driven by higher revenue and lower opex. Revenue increased 9.5% to RM86.4mn mainly due to higher transaction-based fees on the back of increased trading activities on Bursa Malaysia. With incremental transaction-based fees flowing directly to the bottom line, core net profit margins expanded 6.7pp to 20.8%.
  • QoQ. 3QFY20’s core net profit jumped 40.4% to RM8.4mn as revenue climbed further 10.5% to RM31.6mn on the back of the continued rise in trading activities on Bursa Malaysia. In fact, both revenue and core net profit were at record highs.
  • Meanwhile, N2N remained on strong financial standing with a robust net cash position of RM121.3mn or 20.3sen/share (5.2% QoQ, 6.7% YoY) as at end3QFY20.

Impact

  • We have raised our FY20 earnings estimates by 10.4% after raising revenue by 3.2% to reflect actual 3QFY20 results.

Outlook

  • While we expect N2N’s 4QFY20 performance to ease QoQ with trading activity in its home market Malaysia seen to cool off from the record levels in 3QFY20, we remain sanguine on its near-term performance with trading activity observed to be still relatively active YoY which thereby would continue to bode well for the group’s transaction-based fees.
  • Meanwhile, over the near-to-medium term, we continue to view growth opportunities for N2N from: 1) system upgrades (especially with the imminent need for many brokerages in Malaysia to upgrade their ageing back office system), and 2) market share gains across its markets in Asia (aided by its newly launched Asia Trading Hub which is designed to offer end-users more cost effective and seamless cross border trading system). Meanwhile, we also view N2N’s robust war chest to facilitate further merger and acquisition activities.

Valuation

  • In all, we maintain our Buy recommendation on N2N with an unchanged TP of RM1.15 based on 28.0x CY21 EPS which is in line with the stock’s 3-year mean. We continue to like the group for its niche as the largest financial information and trading platform provider in Asia, prospects for market share gains, and strong balance sheet which would support M&A opportunities. Key downside risks include an unprecedented slowdown in trading activity, and poor demand for system upgrade and implementation.
  • Also note that the group is also in the midst of seeking approval from the relevant authorities for the transfer of its listing to the Main Market of Bursa Malaysia, which would bode well for the stock’s marketability.

Source: TA Research - 26 Nov 2020

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Elsoft Research Berhad - Results Missed on Weaker-Than-Expected Demand

Author: sectoranalyst   |  Publish date: Mon, 23 Nov 2020, 5:49 PM


Review

  • Elsoft Research Berhad’s (Elsoft) 9MFY20 core net profit of RM4.4mn (- 65.7%) accounted for 27.3% of our full-year estimates. We deem results to have missed expectations as we earlier expected the group to see a strong pick up going into 2HFY20 alongside the easing of the movement control order. Core net profit mainly excludes loss on disposal of other investment of RM1.2mn and gain on fair value adjustment of other investment of RM0.8mn.
  • YoY. 9MFY20 revenue and core net profit declined 51.6% and 65.7% to RM13.2mn and RM4.4mn respectively mainly due to lower demand for the group’s automated test equipment (ATE) as amid the COVID-19 pandemic its customers have turned cautious on CAPEX, and travel restrictions have delayed the delivery of projects to customers abroad. To a lesser extent, earnings was also hurt by higher share of loss from associates of RM0.5mn.
  • QoQ. 3QFY20’s core net profit rose >100% to RM1.9mn on higher revenue and positive share of contributions from associates. Revenue increased 12.7% to RM4.7mn, partly driven by the automotive segment.
  • Meanwhile, no dividends were declared during the quarter and the group’s financial standing remained strong with a net cash position including other investments of RM64.6mn or 9.6sen/share (+4.7% QoQ, +1.8% YoY) as at end-3QFY20.

Impact

  • We have cut our FY20 earnings estimates by 54.3% after lowering our sales forecast by 39.4% to reflect 3QFY20 actual results and on expectations for weakness to persist towards end-FY20.

Outlook

  • While FY20 is set to be a disappointing year for Elsoft due to disruptions from COVID-19 headwinds, we remain sanguine on the group’s prospects in FY21, which we expect to be driven by backlogs from FY20 as well as opportunities from: 1) newer ATEs including automotive headlamp tester catered to multibeam headlamps and smart devices LED flash tester designed for the next evolution of smartphone flash module, and 2) the medical devices segment which has been focusing on more cost effective, compact, and portable embedded controllers for peritoneal dialysis machines.

Valuation & Recommendation

  • In all, we maintain our Buy recommendation on Elsoft with an unchanged TP of RM0.70 based on a PE multiple of 17.0x against CY21 EPS. Key downside risks include: i) prolonged COVID-19 pandemic, and ii) poor acceptance of new products.

Source: TA Research - 23 Nov 2020

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Elsoft Research Berhad - Weak 1HFY20 Within Expectations

Author: sectoranalyst   |  Publish date: Tue, 1 Sep 2020, 8:52 PM


Review

  • Stripping off exceptional items comprising mainly loss on disposal of other investments amounting to RM1.3mn, Elsoft’s 1HFY20 core net profit of RM2.5mn (-75.6%) accounted for 15.6% of our full-year estimates. We deem results to be within expectation as we expect the group to see improvements in 2HFY20 alongside the ease of the movement control order (MCO) and fulfilment of order backlog from 1HFY20.
  • YoY. 1HFY20’s core net profit sank 75.6% to RM2.5mn as revenue declined 62.3% to RM8.5mn mainly on lower demand for automated test equipment (ATE) and delayed delivery to customers abroad amid travel restrictions to contain the COVID-19 pandemic.
  • QoQ. 2QFY20’s revenue fell mildly 1.5% to RM4.2mn also due to the aforementioned reasons. However, core net profit dropped more rapidly 43.6% to RM0.9mn due to higher share of loss in associate.
  • Elsoft declared a 2nd interim dividend of 0.25sen (2QFY19: 1.00sen), bringing 1HFY20’s to 0.50sen (1HFY19: 2.00sen). Despite its weak performance, we remain comfortable on the group’s dividend paying capacity, which is backed by its strong net cash position (including other investments) that stood at RM61.7mn or 9.2sen/share (-1.6% QoQ, -2.4% YoY) as at end-2QFY20.

Impact

  • We maintain our earnings estimates.

Outlook

  • We expect Elsoft to see muted earnings in FY20 mainly due to disruptions to its operations during the MCO in Malaysia and lockdowns abroad. That said, we expect the group to deliver improved earnings in 2HFY20, driven by the order backlog from 1HFY20. Notwithstanding, we remain sanguine on the group’s prospects underpinned by continued research and development in its core areas, namely automotive and smart devices. Its upcoming series of ATE include automotive headlamp tester catered to multibeam headlamps and smart devices LED flash tester designed for the next evolution of smartphone flash module.

Valuation & Recommendation

  • In all, we maintain our Hold recommendation on Elsoft with an unchanged TP of RM0.70 based on a PE multiple of 17.0x against CY21 EPS. Key risks include: i) prolonged COVID-19 pandemic, ii) single customer concentration, and iii) poor acceptance of new products.

Source: TA Research - 1 Sept 2020

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N2N Connect Berhad- Results Boosted by Increased Trading Activity

Author: sectoranalyst   |  Publish date: Wed, 26 Aug 2020, 4:38 PM


Review

  • N2N’s 1HFY20 core net profit of RM9.6mn (+48.3% YoY) came above our full-year estimates at 63.3%. The surprise on the upside was due to strongerthan-expected transaction fees derived in 2QFY20 on the back of increased trading volume on Malaysia’s bourse (i.e., Bursa Malaysia).
  • YoY. 1HFY20’s core net profit jumped 48.3% to RM9.6mn, driven by higher revenue and lower opex. Revenue grew 2.6% to RM54.8mn mainly on higher equipment rental and higher transaction fees on the back of increased trading volume on Bursa Malaysia.
  • QoQ. 2QFY20’s core net profit surged 66.5% to RM6.0mn mainly due to the aforementioned increase in transaction fees coupled with lower opex. The flow through of incremental transaction fees led PBT margin to expand 10.4pp to 28.4%.
  • Meanwhile, N2N’s remained on strong financial footing with a net cash position including other investments of RM131.9mn or 19.3sen/share (-2.2% QoQ, +3.5% YoY) as at end-2QFY20.

Impact

  • We raise FY20-22 revenue by 2-4% to reflect actual 2QFY20 results, factoring in the stronger-than-expected transaction fees. Correspondingly, our FY20-22 earnings are raised by 24-43%.
  • Also, with the brighter earnings prospects, we increase our dividend assumptions for FY20-22 from 2.0sen/share to 3.0sen/share which implies yield of 3.5% at current level.

Outlook

  • We remain sanguine on N2N’s FY20 performance thanks to its largely resilient business model with the bulk of its revenue recurring i.e., via rental and subscription fees derived from the provision of information service terminals and front office trading and back office system to brokerages and investment banks. The buoyant trading activity recently observed in its home market Malaysia would also bode well for its transaction-based revenue.
  • Besides, we opine that with brokerages and investment banks in Malaysia faced with the unprecedented surge in trading activity, many would also be keen on upgrading their platform and system, potentially benefitting N2N.
  • In the larger scheme of things, we continue to view growth opportunities for N2N in the near-to-medium term from its latest offering, the Asia Trading Hub (ATH) which has thus far been launched in Malaysia. To recap, the ATH which involves the connection of the group’s panel of over 100 brokerage across Asia via a single financial network is designed to offer end-users a more cost effective and seamless cross border trading experience, and thereby, higher operational efficiency for brokerages and investment banks.

Valuation

  • Following our earnings upgrade and ascribing a higher PE multiple of 28.0x (previously 24.0x) which is in line with the stock’s 3-year mean, we raise our TP for N2N to RM1.15 (previously RM0.80). And now with a more favourable risk reward potential, we upgrade our recommendation on the stock from Hold to Buy. Key downside risks include an unprecedented slowdown in trading activity, and poor demand for system upgrade and implementation.
  • We continue to like the group for its niche as the largest financial information and trading platform provider in Asia, decent earnings growth profile, and robust balance sheet. Note that the group is also in the midst of seeking approval from the relevant authorities for the transfer of its listing to the Main Market of Bursa Malaysia which would bode well for the stock’s marketability.

Source: TA Research - 26 Aug 2020

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N2N Connect Berhad- 1QFY20 Results In-Line

Author: sectoranalyst   |  Publish date: Fri, 29 May 2020, 5:09 PM


Review

  • N2N’s 1QFY20 core net profit of RM3.6mn (+103.7% QoQ, -19.3% YoY) came within our full-year estimates at 23.7%.
  • YoY. 1QFY20’s core net profit declined 19.3% to RM3.6mn mainly due to lower revenue, higher opex, and higher taxes. Revenue fell 3.6% to RM26.3mn on lower contributions from Hong Kong as protests in the country had led brokers to rationalise costs including reducing terminal subscriptions.
  • QoQ. 1QFY20’s core net profit surged 103.7%, driven by lower opex. Revenue however only improved marginally 0.1% to RM26.3mn as higher transaction-based revenue alongside the rise in trading activity were largely offset by lower one-time implementation fees.
  • Meanwhile, the group continues to possess a strong balance sheet with its net cash position (including other investments) at RM137.1mn or 21.1sen/share (+0.5% QoQ, -0.2% YoY) as at end-1QFY20.
  • N2N declared a 1st interim dividend of 1.0sen (1QFY19: 1.0sen).

Impact

  • We maintain our earnings estimates.

Outlook

  • Despite the challenging economic outlook due to the COVID-19 pandemic, we remain sanguine on N2N’s FY20 performance thanks to its largely resilient business model whereby the bulk of revenue are recurring (rental and subscription fees from the provision of information service terminals, front office trading and back office settlement systems) versus transactionbased (based on the volume of trades matched via its customers systems).
  • Meanwhile, while the group has seen downside to terminal subscriptions from efforts by customers to rationalise cost, we continue to view growth opportunities in the near-to-medium term underpinned by the roll out of its Asia Trading Hub (ATH). We expect the allure of the ATH, which offers endusers a more seamless and cost-effective cross border trading experience to allow the group to benefit from: i) increased volume-based fees, and ii) market share gains as other brokerages and investment banks recognise its capabilities.

Valuation

  • Upon rolling forward our base year valuation to CY21, we raise our TP for N2N to RM0.80 (previously RM0.65) based on a PE multiple of 24.0x (which is -1SD to the stock’s 3-year mean). However, we downgrade our recommendation on the stock from Buy to Hold due to the narrowed risk reward potential following its recent share price appreciation (+47.6% since our last company update report on 8 April 2020).

Source: TA Research - 29 May 2020

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