Review

• N2N’s 1QFY20 core net profit of RM3.6mn (+103.7% QoQ, -19.3% YoY) came within our full-year estimates at 23.7%.

• YoY. 1QFY20’s core net profit declined 19.3% to RM3.6mn mainly due to lower revenue, higher opex, and higher taxes. Revenue fell 3.6% to RM26.3mn on lower contributions from Hong Kong as protests in the country had led brokers to rationalise costs including reducing terminal subscriptions.

• QoQ. 1QFY20’s core net profit surged 103.7%, driven by lower opex. Revenue however only improved marginally 0.1% to RM26.3mn as higher transaction-based revenue alongside the rise in trading activity were largely offset by lower one-time implementation fees.

• Meanwhile, the group continues to possess a strong balance sheet with its net cash position (including other investments) at RM137.1mn or 21.1sen/share (+0.5% QoQ, -0.2% YoY) as at end-1QFY20.

• N2N declared a 1st interim dividend of 1.0sen (1QFY19: 1.0sen).

Impact

• We maintain our earnings estimates.

Outlook

• Despite the challenging economic outlook due to the COVID-19 pandemic, we remain sanguine on N2N’s FY20 performance thanks to its largely resilient business model whereby the bulk of revenue are recurring (rental and subscription fees from the provision of information service terminals, front office trading and back office settlement systems) versus transactionbased (based on the volume of trades matched via its customers systems).

• Meanwhile, while the group has seen downside to terminal subscriptions from efforts by customers to rationalise cost, we continue to view growth opportunities in the near-to-medium term underpinned by the roll out of its Asia Trading Hub (ATH). We expect the allure of the ATH, which offers endusers a more seamless and cost-effective cross border trading experience to allow the group to benefit from: i) increased volume-based fees, and ii) market share gains as other brokerages and investment banks recognise its capabilities.

Valuation

• Upon rolling forward our base year valuation to CY21, we raise our TP for N2N to RM0.80 (previously RM0.65) based on a PE multiple of 24.0x (which is -1SD to the stock’s 3-year mean). However, we downgrade our recommendation on the stock from Buy to Hold due to the narrowed risk reward potential following its recent share price appreciation (+47.6% since our last company update report on 8 April 2020).

Source: TA Research - 29 May 2020