Coming away from our recent meeting with N2N Connect Berhad’s (N2N) management, we remain sanguine on the group’s prospects. We maintain our expectations for double-digit earnings growth in the near-to-medium term, underpinned by i) market share gains within its 8 markets, supported by the Asia Trading Hub which is expected to go live in 2HCY19, and ii) increased subscription to its new back office settlement system as many brokerages remain keen on replacing their legacy system. Meanwhile, management’s ambitions for M&A and to partake in the set-up of alternative trading system in Malaysia are intact. In all, we reiterate our Buy recommendation on N2N with a lower TP of RM1.20/share (previously RM1.50/share) to reflect the recent issuance of free warrants (1 warrant for every 4 shares). This is based on an unchanged 35.0x CY19 EPS, +1SD to the stock’s 5-year mean. We opine that the stock deserves to trade at a premium owing to its robust earnings growth profile and niche as the largest financial information and trading platform provider in Asia.

Results Preview: FY18 Expected to be Another Record Year

N2N is scheduled to release its financial performance for 4QFY18 in February 2019. We expect core earnings to come in the range of RM4mn to RM5mn, higher QoQ and YoY, supported by recurring income from the provision of trading and settlement systems as well as one-time fees from the implementation of new systems, leading the group to achieve another record year. To recap, the group’s 9MFY18 revenue and core net profit increased 15.3% YoY and 36.9% YoY to RM80.3mn and RM14.3mn. This was mainly due to the consolidation of contributions from Hong Kong, Vietnam and Macau following the acquisition of N2N-AFE (Hong Kong) Ltd on 31 March 2017.

Near-to-Medium Term Growth Prospects Intact

Ahead of FY18, we remain sanguine on the group’s growth prospects with expectations for double-digit earnings growth in FY19/FY20 (+24.4%/+14.8%) to be underpinned by i) market share gains within its 8 markets (i.e., Hong Kong, Malaysia, Singapore, Vietnam, Philippines, Macau, Indonesia and Thailand), supported by the Asia Trading Hub (ATH) which is expected to go live in 2HCY19, and ii) increased subscription to its new back office settlement system as many brokerages remain keen on replacing their legacy system.

Formation of Asia Trading Hub on Track

Of note, the formation of the ATH is on track with Hong Kong and Singapore already linked while that of the remaining 6 markets is targeted for completion in 1HCY19. We opine that with increased awareness of the ATH’s capabilities once it goes live, there will be greater interest by other brokerages within the group’s existing markets to join its platform. Recall that the ATH will facilitate N2N’s panel of over 100 brokerages in providing a more seamless and economical cross border trading experience to their end-users and hence, is expected to result in an increase in transaction-based fess generated by the group as the volume of cross border trade pick up.

Opportunities from Replacement of Back Office Settlement System

Besides, management remains excited on the opportunities to replace the legacy back office settlement system of brokerages. We note that since the group introduced its new back office settlement system in 2018, it has been successfully implemented for 2 brokerages in the Philippines. And encouragingly, the group has participated in a tender by a stockbroking association and is currently in discussion with a few parties. We believe that the new back office settlement system will be preferred by brokerages that are currently on N2N’s platform given the ease of integration with their front office system.

Ambitions for M&A and Alternative Trading System Intact

Meanwhile, management alluded that it is still on the lookout for M&A opportunities. Backed by the group’s robust net cash position of RM123.6mn, targets include similar businesses abroad to broaden and expand its brokerage network, as was done with the acquisition of N2N-AFE (Hong Kong) Ltd), as well as businesses in the area of FinTech. On a different note, management also highlighted that it remains interested to partake in the set-up of an alternative trading system in Malaysia. And interestingly for this, we note that the group will be able to leverage on the expertise of SBI Japannext Co Ltd, which operates Japan’s largest proprietary trading system. Recall that the Japanese party had recently emerged as N2N’s 3rd largest shareholder with a stake of 11.65%.

Valuation & Recommendation

In all, we reiterate our Buy recommendation on N2N with a lower TP of RM1.20/share (previously RM1.50/share) to reflect the recent issuance of free warrants (1 warrant for every 4 shares). This is based on an unchanged 35.0x CY19 EPS, +1SD to the stock’s 5-year mean. We opine that the stock deserves to trade at a premium owing to its robust earnings growth profile (FY18/FY19/FY20: +19.7%/+24.4%/+14.8%) and niche as the largest financial information and trading platform provider in Asia. Key risks include: 1) a delay in the formation of the Asia Trading Hub and 2) slower capital market trading activity.

Source: TA Research - 22 Jan 2019