Review

• N2N’s 1QFY19 core net profit of RM4.4mn (+52.9% QoQ, +10.9% YoY) came below ours and consensus estimates at 19.4% and 17.4% respectively. The miss was due to higher-than-expected depreciation and amortisation. Revenue and EBITDA, however, were in line respectively accounting for 23.8% and 23.5% of our forecasts.

• A first interim dividend of 1.0sen/share was declared, representing 33.3% of our FY19 forecast of 3.0sen/share which implies a forward yield of 4.0%.

• Core net profit increased 52.9% QoQ and 10.9% YoY to RM4.4mn. The bottom-line growth on a QoQ basis was mainly due to lower provisions for trade receivables and non-recurring administration expenses while that on a YoY basis was in tandem with revenue increasing 6.1% YoY to RM27.2mn.

• Meanwhile, the group’s balance sheet remained healthy with a robust net cash position of RM118.1mn or 21.1sen/share (-4.9% QoQ, +36.5% YoY). The cash pile was boosted via proceeds from the conversion of warrants and a private placement exercise conducted in 2018.

Impact

• Upon raising our depreciation and amortisation charges, our FY19/FY20/FY21 earnings estimates are reduced 4.3%/3.5%/2.9% to RM21.9mn/RM25.5mn/ RM29.2mn.

Outlook

• Following the downward earnings revision, we still project double-digit earnings growth for FY19/FY20/FY21 (26.5%/16.6%/14.4%). Our expectations are underpinned by opportunities from the replacement of brokerages ageing legacy back office settlement systems as well as market share gains within existing markets across Asia (i.e., Hong Kong, Malaysia, Singapore, Vietnam, Philippines, Macau, Indonesia and Thailand) as the Asia Trading Hub’s capabilities gain recognition. The Asia Trading Hub, which involves the linking of the group’s online trading platforms across its markets to facilitate a more economical and seamless cross border trading experience, is targeted to go live in the middle of 2019.

• Meanwhile, there are also prospects from the collaboration with the group’s strategic and substantial shareholders, namely SBI Holdings Inc (financial conglomerate in Japan) and SBI Japannext Co Ltd (operator of Japan’s largest proprietary trading system) to venture into the set up of a digital asset exchange.

Valuation

• Following our earnings cut and pegging to a lower PE multiple of 28.0x (previously 35.0x), in line with the stock’s 3-year mean, against CY20 diluted EPS upon rolling forward our base year valuation, our TP for N2N is lowered to RM1.02/share (previously RM1.14/share).
• We like the group for its robust earnings growth profile and niche as the largest financial information and trading platform provider in Asia. Reiterate Buy. Key risks include: 1) delay in the formation of the Asia Trading Hub and 2) sluggish replacement of back office settlement systems and 3) slower capital market activity.

Source: TA Research - 21 May 2019