Investment Highlights

• We reiterate our BUY recommendation on N2N Connect (N2N) but trim our FY19F–FY21F forecasts by 13%–18% to account for the subdued trading volume. We also reduce our fair value to RM0.95/share (previously RM1.18/share), pegged to an unchanged FY19F PE of 25x.

• Stripping off forex exchange impact, N2N’s 1QFY19 core net profit rose 23% YoY to RM5.4mil. However, it still fell short of our full-year forecast and market consensus accounting for only 19% and 21% respectively, largely due to lower trading activities in the local equity market.

• While the company saw better cost control and reduction in overlapping licences from its Hong Kong subsidiary AFE Solutions Limited (AFE), it was partially offset by lower average daily trading volume which decreased 15% YoY while traded value dipped 26% YoY.

• Comparing QoQ, N2N recorded a 39% jump in core net profit on the back of improved trading volume (+24% QoQ) and value (+32% QoQ) as 4QFY18 was plagued with negative global sentiment. On top of that, the cost savings from the AFE side has led to 7ppt increase in pre-tax margin. The company will continue to see improvement in margins as overlapping licences will be terminated progressively upon expiry.

• N2N plans to launch a new digital platform in mid-FY19 based on blockchain technology. The digitalised platform allows trading of multiple financial instruments in one venue, including equities, derivatives and currencies. This should provide better accessibility, improved liquidity and reduced transaction cost. We have not factored in any earnings contribution from this new digital platform as adoption may be slower than expected due to the current weak market sentiment.

• Near-term earnings will be driven by the replacement of back office system (BOS). The company is currently in talks with clients from the Philippines 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. The existing BOS system in local houses is not efficient enough to cope with new features, and with the implementation of new instruments such as the IDSS and T+2 settlement, the system needs to process transactions more frequently which necessitates an 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 market share from global competitors such as Bloomberg and Thomson Reuters.

Source: AmInvest Research - 21 May 2019