Investment Highlights

• We keep our BUY recommendation on N2N Connect (N2N) but trim our FY19F–FY20F forecasts by 13%–14% respectively to account for lower trading volume. We also reduce our fair value to RM1.18/share (previously RM1.35/share), pegged to an unchanged FY19F PE of 25x.

• After adjusting for forex impact, N2N’s FY18 core net profit of RM13.3mil (-16.5% YoY) came in broadly within our expectation but below consensus numbers, accounting for 98% of our full-year forecast but missed full-year consensus estimates by 18%. The difference was largely due to the one-off tax penalty charge amounting to RM5.3mil.

• N2N posted a 4QFY18 core profit of RM3.9mil, a 13% YoY gain compared with RM3.5mil in 4QFY17. The increase was mainly due to improvement in cost control and reduction in overlapping licences from its Hong Kong subsidiary – AFE Solutions Limited (AFE). As a result, EBITDA margin climbed 4.2 ppts to 32.8% in 4QFY18 compared with 28.6% in 4QFY17. Recall that the acquisition of AFE resulted in overlapping licences for market data subscriptions, which will be terminated progressively upon expiry.

• N2N plans to launch a new digital platform in 2QFY19 based on blockchain technology. The digitalised platform will allow trading of multiple financial instruments in one venue, including equities, derivatives and currencies. This should provide better accessibility, improved liquidity and reduced transaction cost. N2N will tap onto SBI Holdings’ (SBI) expertise in running blockchain exchanges in Japan. SBI has a 32% stake in N2N.

• N2N has recently secured its first client in the Philippines for the replacement of back office systems (BOS) which has commenced in February. The company is currently discussing with 2 more Philippine clients and several local brokers, and expects to secure 2–3 more BOS contracts this year with total value estimated at RM12- 36mil. Earnings contribution from this will be spread out until FY2020, depending on the time of implementation. A traditional BOS typically costs RM8–12mil. We understand that most brokers’ BOS are 15–25 years old and a replacement is long overdue. The increasing complexity of trading procedures, such as the recent introduction of short-selling, requires a more advanced BOS, thereby necessitating a system upgrade.

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

Source: AmInvest Research - 26 Feb 2019