Investment Highlights

• We reiterate our BUY recommendation on N2N Connect (N2N) with an unchanged fair value of RM1.50/share, pegged to an FY19F PE of 25x. However, we have lowered our FY18F net profit forecast by 21% to account for RM5.3 additional tax and penalty for the years of assessment 2012 to 2016. Our FY19F and FY20F forecasts are unchanged.

• N2N announced that it has paid additional tax and penalty to the Inland Revenue Board of Malaysia (IRB). This was due to IRB disallowing certain capital allowances and intercompany expenses in relation to N2N and N2N Global Solutions. Both companies were charged RM2.8mil and RM2.5mil respectively in additional tax and penalty. As a result, we estimate an increase in effective tax rate to 26% from 6% for FY18F.

• Management guided that the entirety of this additional tax and penalty would be recognised in the upcoming quarterly results. Hence, we expect soft earnings in 2QFY18. However, we believe the expense is one-off in nature and therefore, would not affect core earnings going forward.

• On a positive note, we believe the long-term prospects of N2N is still intact given its potential strategic collaboration with SBI Holdings (SBI). Recall that the two parties intend to develop a blockchain-enabled platform to digitise the trading of multiple financial instruments in one venue, including equities, derivatives, currencies, etc.

• In terms of technological expertise, SBI has already started the ball rolling with the launch of Japan’s first bank-backed cryptocurrency exchange, VCTRADE early June. With the underlying technology already in place, one of N2N’s key roles now is to establish a legal framework for the technology applications and seek approval from respective regulators for deployment. Management has indicated that the deployment could begin as early as 2019.

• Apart from the collaboration with SBI, N2N’s near-term earnings are expected to be driven by an industry-wide replacement of back office systems (BOS). Most brokers’ BOS are 15-25 years old and a replacement is long overdue. N2N has thus far secured 5 brokers for its TC BOS – 3 from the Philippines, 1 from Thailand and another 1 from Malaysia. There are currently 28 brokers in Malaysia, and a traditional BOS typically costs RM8-12mil.

• 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 - 10 Jul 2018