Investment Highlights

• We initiate coverage on N2N Connect (N2N) with a BUY and a fair value of RM1.52/share. Our fair value is pegged to an FY19F PE of 25x, a discount to the peer average of 33x given its smaller market capitalisation (see Exhibit 7). The stock has been trading at an average PE of 35x in the past 3 years. Including an expected dividend yield of 3%, the stock offers an implied upside of 49%.

• We believe the market has not fully priced in a major earnings boost from the acquisition of AFE Solutions (AFE) last year. N2N’s revenue more than doubled in FY17, lifting its core net profit by 36% after a 9-month consolidation of AFE’s results. Moving forward, N2N's earnings are expected to accelerate further as the group fully unlocks synergies from the acquisition.

• Notably, the acquisition allows N2N to: 1) cross-sell its mobile trading platforms to AFE's clients in Hong Kong; 2) terminate overlapping data licences such as securities price data and news subscriptions; and 3) reduce other unnecessary overheads such as relocating its HK office to a more economical location. The bulk of the synergies is expected to be realised in FY18F.

• N2N’s TCPro Global, an integrated financial trading platform co-developed with Nikkei, is set to take off in the coming years. With the new killer product, the group is ready to compete on a regional scale. Management said that the group now aims to pursue fast-track rollouts of TCPro Global via horizontal acquisitions, further expanding its regional footprint and growing its market share in the space.

• There is also a Main Market transfer angle to N2N given that its profit track record adequately satisfies Bursa Malaysia's “profit test” requirement. The transfer would open the door to investing in N2N for market participants who are prohibited from purchasing ACE market counters. This is expected to improve liquidity in the trading of N2N shares. In addition, it would likely boost the profile of the company.

• We also see potential earnings kicker from an industry-wide replacement of back-office systems (BOS). Currently, 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 up-to-date BOS. This would spur the demand for N2N’s BOS in the near term.

• Overall, we project N2N’s core net profit to grow at a sturdy CAGR of 32% from RM16mil in FY17 to RM36mil in FY20F. We 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 - 31 May 2018