Investment Highlights

• We downgrade our recommendation on N2N Connect (N2N) to HOLD from BUY with a reduced fair value of RM0.70/share (previously RM0.95/share). We cut our FY19F–FY21F forecasts by 14%–15% after lowering our assumption for revenue from transaction fees. Our fair value is pegged to an unchanged FY19F PE of 25x.

• For 1HFY19, N2N posted a core net profit of RM8.5mil, up 18.3% YoY due to a lower effective tax rate. However, the results only accounted for 38% of our full-year forecast and market consensus, owing to lower trading value in the equity market. Revenue slid 2.9% YoY to RM53.4mil.

• Due to N2N’s emphasis on recurring income, it is highly susceptible to trading activities. Daily average trading value in Malaysia fell 25% YoY to RM2.04bil (1HFY18: RM2.72bil) while daily average trading value in Hong Kong declined 23% YoY to HK$96.7bil (1HFY18: HK$125.7bil).

• In 2QFY19, N2N’s core net profit came in at RM3.1mil (- 44% QoQ, +10% YoY). The 44% QoQ drop was due to lower revenue from one-time implementation fee coupled with a one-off US$150,000 settlement fee paid to SAKK Consulting Inc (SAKK). Recall, N2N had a dispute with SAKK regarding the fees for advisory service rendered during the acquisition of AFE Solutions Ltd.

• N2N is still working with SBI Group in Japan to launch a new digital platform 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.

• Replacements of back office system (BOS) will still be the driver for near-term earnings. The company is in the midst of securing 2–3 more BOS contracts with brokers in the Philippines and several local brokers 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.

• We still like N2N due to: 1) its leading position in the online trading solutions space; and 2) the affordability of TCPro Global, which could help it win market share from global competitors such as Bloomberg and Thomson Reuters. However, we foresee that N2N’s revenue from transaction fees will continue to be subdued, owing to lacklustre trading activity in the equity market.

Source: AmInvest Research - 22 Aug 2019