TA Sector Research

Author: sectoranalyst   |   Latest post: Fri, 29 Nov 2019, 9:01 AM


N2N Connect Berhad - Higher-Than-Expected Margins in 3QFY19

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N2N’s 9MFY19 core net profit of RM11.1mn (-22.3%) came above our estimates at 80.3%. The surprise on the upside was due to the higher-thanexpected margins achieved in 3QFY19 on the back of lower operating expenses which drove EBITDA margins to expand 9.0pp QoQ and 2.1pp YoY to 30.4%.

YoY. 9MFY19’s revenue and core net profit declined 1.7% and 22.3% to RM78.9mn and RM11.1mn respectively. Earnings fell at a faster pace mainly due to: 1) a lower mix of one-time implementation charges which generally fetch higher margins, and 2) the one-off expenses incurred in 2QFY19 for: i) the settlement of a lawsuit (RM0.6mn), and ii) the exercise to harmonise products in Hong Kong and Malaysia (RM0.7mn).

QoQ, 3QFY19’s core net profit surged 130.6% to RM4.7mn mainly due to lower operating expenses in part due to the absence of the aforementioned one-off expenses incurred in 2QFY19. Revenue however declined 2.7% to RM25.5mn mainly on lower transaction-based fees.


To reflect the higher-than-expected margins, we have raised our margin assumptions across FY19/FY20/FY21 by ~1pp and as a result, our earnings estimates for the corresponding period are raised by 7.1%/6.6%/6.0%.


Despite N2N’s weak 9MFY19 numbers, we remain positive on its near-tomedium term prospects with growth opportunities present from: 1) market share gains for its trading platform across its key markets in Asia (Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Thailand, & Vietnam), and 2) the replacement of brokerages aging legacy back office settlement systems.

We believe that more brokerages and investment banks will be allured by N2N’s trading platform which has just started to feature enriched cross border trading capabilities via its Asia e-Broker and Asia Trading Hub platforms. The platforms were recently launched in Malaysia on 7 November 2019 and will soon be available for customers in Hong Kong and Singapore.

Meanwhile, we do not expect the political unrest in Hong Kong (~50% of N2N’s revenue) to weigh on the group’s financial performance as the business model there is based on a license and rental model whereby revenue is mainly fixed comprising of one-off software license fees and fees from the rental of terminals, or in other words, its revenue is independent of trade volumes.

Valuation & Recommendation

After raising our earnings estimates, we arrive at a higher TP of RM0.83/share (previously RM0.77) for N2N, pegged to 25.0x CY20 EPS which is -1SD to the stock’s 3-year mean. Also, with the increased risk reward potential, we upgrade our recommendation from Hold to Buy. Key risks include poor demand for new system implementation

Source: TA Research - 21 Nov 2019

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