• N2N announced last Friday a proposed bonus issue of warrants up to a maximum of 149,469,460 warrants based on 1 warrant for every 4 existing N2N shares held. The maximum number of proposed warrants was arrived at after taking into account that all of the 30.6mil treasury shares will be resold in the open market.

• The exercise price of the warrants will be determined by the board at a later date, following the receipt of all relevant approvals and after taking into consideration of: (1) the historical price movement; (2) the 5-day volume weighted average market price (VWAP); and (3) prevailing market conditions.

• The proposed bonus issuance of warrants can be exercised within 5 years commencing from the issuance date, with an exercise right of 1 new N2N share for each warrant.

• With an indicative exercise price of RM0.98 per warrant, upon the full conversion of the warrants, the issuance of 149.47mil shares is expected to raise RM146.48mil. Proceeds from the exercise are to be utilised for each component of working capital subject to the company’s operating requirements.

• The increase in its share base to 747,347,301 shares from 597,877,841 shares (inclusive of 30.6mil treasury shares) would dilute N2N’s EPS by 12.5%. Our indicative fair value post-EPS dilution is RM1.31/share based on 25x FY19F EPS.

• The dilutive impact may be minimised by the returns on investment of the warrant proceeds. We believe the long-term prospects of N2N are still intact given its potential strategic collaboration with SBI Holdings (SBI) to develop a blockchain-enabled trading platform.

• In the near term, we expect earnings to be driven by the replacement of back-office system (BOS). We understand that most brokers’ BOS are 15–25-years-old and a replacement is long overdue. The increasing complexity of trading procedures require a more advance BOS, thereby necessitating a system upgrade.

• We continue to like N2N due to: 1) its leading position in the online trading solution space; 2) the acquisition of AFE, which offers tremendous earnings accretion; and 3) the affordability of TCPro Global, which could help the group win market share from global competitors such as Bloomberg and Thomson Reuters. Maintain BUY at an unchanged fair value of RM1.50.

Source: AmInvest Research - 7 Nov 2018