Review

• N2N reported 3QFY18 core net profit of RM3.1mn (-57.9% QoQ, -5.7% YoY), bringing 9MFY18’s to RM14.3mn (+36.9% YoY). This came below ours and consensus estimates at 63.5% and 59.6% respectively. The miss was due to lower than expected profitability in 3QFY18. Core net profit excludes exceptional items amounting to RM4.0mn mainly from the additional tax liability and tax penalty of RM5.3mn for the year of assessment 2012 to 2016.

• Separately, a second interim dividend of 1.0sen/share was declared (YTD: 3.8sen/share).

• In 3QFY18, core net profit fell 57.9% QoQ due to the absence of one-time implementation fees which command higher margins, resulting in margins contracting 12.6pp QoQ to 12.1%. On YoY basis, revenue and core net profit declined 10.4% and 5.7% due to the weakening of the Hong Kong Dollar against the ringgit.

• YTD. 9MFY18’s revenue and core net profit increased 15.3% YoY and 36.9% YoY mainly due to the consolidation of AFE’s financials following its acquisition on 31 March 2017. AFE which includes contributions from Hong Kong, Vietnam and Macau accounted for 54.9% of the group’s revenue.

• Meanwhile, the group’s net cash position remains robust at RM123.6mn or ~21.8sen/share (-0.7% QoQ, +133.0% YoY).

Impact

• We cut our FY18/FY19/FY20 earnings estimates by 14.2%/12.6%/12.0% to RM19.4mn/RM24.1mn/RM27.7mn after toning down our margin assumptions on account of the lower than expected profitability. That said, we still expect margins to improve alongside cost synergies yielded from the harmonisation of the group’s maiden and latest operations.

Outlook

• The group is in the midst of forming an Asia Trading Hub which is a Pan Asia expansion plan that will see all its panel brokers across the region connected via a single financial network. By doing so, it will facilitate cross border trading seamlessly across exchanges that is presently challenged by the geographical divide and cost. Phase 1 of the expansion involves the linking of Hong Kong, Malaysia and Singapore which is expected to complete in 4QFY18/1QFY19.

• In the meantime, there is prospects from business alliances with SBI, a financial conglomerate in Japan with a leading position in the online securities industry, which the group is currently in talks with. SBI is also a strategic and substantial shareholder of N2N with a stake of 20.2%.

Valuation

• Our TP for N2N is lowered to RM1.50/share (RM1.70/share previously) based on an unchanged PE of 35.0x against CY19 EPS. We like the group for its: 1) double-digit earnings growth prospect, 2) prospective revenue stream arising from the formation of the Asia Trading Hub, and 3) synergies from strategic partnerships and merger and acquisition facilitated by its robust balance sheet. Reiterate Buy. Key risks include: 1) a delay in the formation of the Asia Trading Hub and slower capital market trading activity.

Source: TA Research - 22 Nov 2018