Review

• N2N’s 9MFY19 core net profit of RM11.1mn (-22.3%) came above our estimates at 80.3%. The surprise on the upside was due to the higher-thanexpected margins achieved in 3QFY19 on the back of lower operating expenses which drove EBITDA margins to expand 9.0pp QoQ and 2.1pp YoY to 30.4%.

• YoY. 9MFY19’s revenue and core net profit declined 1.7% and 22.3% to RM78.9mn and RM11.1mn respectively. Earnings fell at a faster pace mainly due to: 1) a lower mix of one-time implementation charges which generally fetch higher margins, and 2) the one-off expenses incurred in 2QFY19 for: i) the settlement of a lawsuit (RM0.6mn), and ii) the exercise to harmonise products in Hong Kong and Malaysia (RM0.7mn).

• QoQ, 3QFY19’s core net profit surged 130.6% to RM4.7mn mainly due to lower operating expenses in part due to the absence of the aforementioned one-off expenses incurred in 2QFY19. Revenue however declined 2.7% to RM25.5mn mainly on lower transaction-based fees.

Impact

• To reflect the higher-than-expected margins, we have raised our margin assumptions across FY19/FY20/FY21 by ~1pp and as a result, our earnings estimates for the corresponding period are raised by 7.1%/6.6%/6.0%.

Outlook

• Despite N2N’s weak 9MFY19 numbers, we remain positive on its near-tomedium term prospects with growth opportunities present from: 1) market share gains for its trading platform across its key markets in Asia (Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Thailand, & Vietnam), and 2) the replacement of brokerages aging legacy back office settlement systems.

• We believe that more brokerages and investment banks will be allured by N2N’s trading platform which has just started to feature enriched cross border trading capabilities via its Asia e-Broker and Asia Trading Hub platforms. The platforms were recently launched in Malaysia on 7 November 2019 and will soon be available for customers in Hong Kong and Singapore.

• Meanwhile, we do not expect the political unrest in Hong Kong (~50% of N2N’s revenue) to weigh on the group’s financial performance as the business model there is based on a license and rental model whereby revenue is mainly fixed comprising of one-off software license fees and fees from the rental of terminals, or in other words, its revenue is independent of trade volumes.

Valuation & Recommendation

• After raising our earnings estimates, we arrive at a higher TP of RM0.83/share (previously RM0.77) for N2N, pegged to 25.0x CY20 EPS which is -1SD to the stock’s 3-year mean. Also, with the increased risk reward potential, we upgrade our recommendation from Hold to Buy. Key risks include poor demand for new system implementation

Source: TA Research - 21 Nov 2019