We opine that the recent market-wide sell-off amid domestic political uncertainty and the COVID-19 pandemic has brought N2N down to attractive valuation levels. The stock is down 28.0% YTD and at current levels, is trading 19.0x against CY20 EPS, which is >1.5sd below its 3-year mean of 30.8x. Most importantly, amid the prevailing turmoil roiling the global economy and financial markets, we remain sanguine on N2N’s performance thanks to its business model whereby the bulk of the group’s revenue stream is largely recurring. In all, we maintain our Buy recommendation on N2N, albeit with a lower TP of RM0.65 (previously RM0.78) as we have cut our CY20 earnings to price in expectations for softer trading activity and lower one-time implementation fees amid the economic uncertainties posed by COVID-19.

Largely Recurring Revenue Stream Provides Stability Amid Turmoil

Amid the prevailing turmoil roiling the global economy and financial markets, we remain sanguine on N2N’s performance thanks to its business model whereby the bulk of the group’s revenue stream is largely recurring (~79%) versus transactionbased (~19%). To recap, its recurring revenue mainly comprise the rental and subscription fees received for the provision of information service terminals, front office trading and back office settlement systems, and management network services, while transaction-based revenue is dependent on the volume of trades matched via its systems.

Trimmed Earnings Due to Envisaged Slowdown in the Economy

While N2N’s revenue stream is largely recurring in nature, we have trimmed our CY20 earnings estimates by 16.3% after lowering our sales assumption by 5.2% as we opine that the envisaged slowdown in the economy could see: i) softer trading activity, and ii) customers (i.e., brokerages and investment banks) defer plans to upgrade their systems. Note that the impact of the revenue revision to earnings is stronger as one-time implementation fees typically command higher margins.

Prepared for the Worst

Meanwhile, with the COVID-19 pandemic having led to the enforcement of containment measures across many parts of the world including Malaysia (via the movement control order) where N2N is headquartered, management reassured that the group’s operations across its markets in Asia have been on-going without any degradation in the level of customer service and support as its business continuity plans have taken into account the need to operate remotely. Note that it is important for the group to ensure the continuity of operations during this period as it is business as usual for its customers with the financial markets in their respective markets remaining open.

Source: TA Research - 8 Apr 2020