Investment Highlights

• We keep our BUY recommendation on N2N Connect (N2N) but trim our FY19F forecasts by a slight 2.5% after factoring in the settlement charges to SAKK Consulting Inc (SAKK). We adjust our fair value to RM0.93/share (previously RM0.95), pegged to an unchanged FY19F PE of 25x.

• N2N announced yesterday that the company has agreed to settle the claim by SAKK for a consideration of US$150,000, approximately RM630,000. The settlement amount will be recognised in the upcoming quarter results but we deem the impact to be marginal.

• Recall in Nov 2017, the company received a letter issued by the High Court of Hong Kong claiming for US$411,946 to be paid to SAKK for services rendered.

• According to the letter, N2N engaged SAKK for merger and acquisition advisory services during the acquisition of AFE Solutions Limited (AFE) in Hong Kong but failed to pay for services rendered. The US$411,946 represents 2% of the company’s consideration for the acquisition of AFE.

• After contesting the claim multiple times, N2N has finally agreed to settle all disputes and claims with SAKK for a sum of US$150,000.

• Fundamentals of the company remain intact as the impact of the claim is negligible. 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 the BOS 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. The new T+2 settlement rule will likely lead to improved trading volume and trading value compared with the previous T+3 system.

• 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 - 24 May 2019