Review

• N2N’s 9MFY20 core net profit of RM18.0mn (+61.8%) came above our fullyear estimates at 82.8% due to stronger-than-expected contributions from transaction-based fees in 3QFY20 alongside the momentous rise in trading activities on Malaysia’s bourse (i.e., Bursa Malaysia).

• YoY. 9MFY20’s core net profit surged 61.8% to RM18.0mn, driven by higher revenue and lower opex. Revenue increased 9.5% to RM86.4mn mainly due to higher transaction-based fees on the back of increased trading activities on Bursa Malaysia. With incremental transaction-based fees flowing directly to the bottom line, core net profit margins expanded 6.7pp to 20.8%.

• QoQ. 3QFY20’s core net profit jumped 40.4% to RM8.4mn as revenue climbed further 10.5% to RM31.6mn on the back of the continued rise in trading activities on Bursa Malaysia. In fact, both revenue and core net profit were at record highs.

• Meanwhile, N2N remained on strong financial standing with a robust net cash position of RM121.3mn or 20.3sen/share (5.2% QoQ, 6.7% YoY) as at end3QFY20.

Impact

• We have raised our FY20 earnings estimates by 10.4% after raising revenue by 3.2% to reflect actual 3QFY20 results.

Outlook

• While we expect N2N’s 4QFY20 performance to ease QoQ with trading activity in its home market Malaysia seen to cool off from the record levels in 3QFY20, we remain sanguine on its near-term performance with trading activity observed to be still relatively active YoY which thereby would continue to bode well for the group’s transaction-based fees.

• Meanwhile, over the near-to-medium term, we continue to view growth opportunities for N2N from: 1) system upgrades (especially with the imminent need for many brokerages in Malaysia to upgrade their ageing back office system), and 2) market share gains across its markets in Asia (aided by its newly launched Asia Trading Hub which is designed to offer end-users more cost effective and seamless cross border trading system). Meanwhile, we also view N2N’s robust war chest to facilitate further merger and acquisition activities.

Valuation

• In all, we maintain our Buy recommendation on N2N with an unchanged TP of RM1.15 based on 28.0x CY21 EPS which is in line with the stock’s 3-year mean. We continue to like the group for its niche as the largest financial information and trading platform provider in Asia, prospects for market share gains, and strong balance sheet which would support M&A opportunities. Key downside risks include an unprecedented slowdown in trading activity, and poor demand for system upgrade and implementation.

• Also 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 Nov 2020