Review

• N2N’s 1HFY20 core net profit of RM9.6mn (+48.3% YoY) came above our full-year estimates at 63.3%. The surprise on the upside was due to strongerthan-expected transaction fees derived in 2QFY20 on the back of increased trading volume on Malaysia’s bourse (i.e., Bursa Malaysia).

• YoY. 1HFY20’s core net profit jumped 48.3% to RM9.6mn, driven by higher revenue and lower opex. Revenue grew 2.6% to RM54.8mn mainly on higher equipment rental and higher transaction fees on the back of increased trading volume on Bursa Malaysia.

• QoQ. 2QFY20’s core net profit surged 66.5% to RM6.0mn mainly due to the aforementioned increase in transaction fees coupled with lower opex. The flow through of incremental transaction fees led PBT margin to expand 10.4pp to 28.4%.

• Meanwhile, N2N’s remained on strong financial footing with a net cash position including other investments of RM131.9mn or 19.3sen/share (-2.2% QoQ, +3.5% YoY) as at end-2QFY20.

Impact

• We raise FY20-22 revenue by 2-4% to reflect actual 2QFY20 results, factoring in the stronger-than-expected transaction fees. Correspondingly, our FY20-22 earnings are raised by 24-43%.

• Also, with the brighter earnings prospects, we increase our dividend assumptions for FY20-22 from 2.0sen/share to 3.0sen/share which implies yield of 3.5% at current level.

Outlook

• We remain sanguine on N2N’s FY20 performance thanks to its largely resilient business model with the bulk of its revenue recurring i.e., via rental and subscription fees derived from the provision of information service terminals and front office trading and back office system to brokerages and investment banks. The buoyant trading activity recently observed in its home market Malaysia would also bode well for its transaction-based revenue.

• Besides, we opine that with brokerages and investment banks in Malaysia faced with the unprecedented surge in trading activity, many would also be keen on upgrading their platform and system, potentially benefitting N2N.

• In the larger scheme of things, we continue to view growth opportunities for N2N in the near-to-medium term from its latest offering, the Asia Trading Hub (ATH) which has thus far been launched in Malaysia. To recap, the ATH which involves the connection of the group’s panel of over 100 brokerage across Asia via a single financial network is designed to offer end-users a more cost effective and seamless cross border trading experience, and thereby, higher operational efficiency for brokerages and investment banks.

Valuation

• Following our earnings upgrade and ascribing a higher PE multiple of 28.0x (previously 24.0x) which is in line with the stock’s 3-year mean, we raise our TP for N2N to RM1.15 (previously RM0.80). And now with a more favourable risk reward potential, we upgrade our recommendation on the stock from Hold to Buy. Key downside risks include an unprecedented slowdown in trading activity, and poor demand for system upgrade and implementation.

• We continue to like the group for its niche as the largest financial information and trading platform provider in Asia, decent earnings growth profile, and robust balance sheet. Note that the group is also in the midst of seeking approval from the relevant authorities for the transfer of its listing to the Main Market of Bursa Malaysia which would bode well for the stock’s marketability.

Source: TA Research - 26 Aug 2020