Going into 2021, we remain sanguine on N2N’s performance as we expect its contributions from Malaysia to remain robust. This is in anticipation for trading activity to remain strong on the back of sustained interest from the new wave of retail investors, ample liquidity amid the low interest rate environment, and bouts of volatility amid prevailing risks from the COVID19 pandemic, global and local economic recovery, and domestic politics. Meanwhile, we continue to view near-to-medium catalysts for N2N from the Asia Trading Hub, back office system replacement opportunities in Malaysia, and mergers and acquisitions. In all, we maintain our Buy recommendation on N2N with an unchanged TP of RM1.15 based on 28.0x CY21 EPS which is closely in line with the stock’s 3-year mean.

More Than Resilient to COVID-19 Headwinds

To recap, N2N has turned out to be more than resilient to COVID-19 headwinds. Its 9MFY20 revenue grew 9.5% to RM86.4mn while core net profit jumped 61.8% to RM18.0mn largely thanks to the surge in trading activity in Malaysia (~42% of revenue), fuelled by increased retail participation. And notably in 3QFY20, with trading activity hitting all-time highs, the group also achieved record high results with revenue and core net profit respectively at RM31.6mn (+10.5% QoQ, +24.0% YoY) and RM8.4mn (+40.4% QoQ, +80.6% YoY).

Essentially, the group has benefitted from higher trading activity in Malaysia as the revenue model here comprises of: i) variable transaction-based fees, which are dependent on the value and volume of trades matched via its trading platform, and ii) fixed monthly subscription fees for managed network services.

We Expect Contributions from Malaysia to Remain Robust in 2021…

Going into 2021, we remain sanguine on N2N’s performance as we expect its contributions from Malaysia to remain robust. Acknowledging that a repeat of the momentous trading activity seen in 3QFY20 is unlikely following the expiry of the 6-month loan repayment moratorium at end-September 2020 and the easing of the movement control order, we expect it to remain higher versus pre-COVID-19 levels in the foreseeable term.

We believe trading activity will remain strong on the back of sustained interest from the new wave of retail investors, ample liquidity amid the low interest rate environment, and bouts of volatility amid prevailing risks from the COVID-19 pandemic, global and local economic recovery, and domestic politics. Indeed, trading activity on the local bourse thus far in 4QFY20 is observed to remain stronger YoY with both trading volume and value in October and November 2020 >100% YoY (see Figure 1 and Figure 2).

…While That from Hong Kong to Remain Resilient

Unlike Malaysia, N2N’s other key market Hong Kong (~48% of revenue) has not benefitted from the surge in trading activity during the year because it operates purely under a license and rental model. Nevertheless, we expect performance there to remain resilient, supported by the increased opportunities for the provision of back-office solutions.

Management highlighted that with brokerages in Hong Kong seen to rationalise costs amid the country’s political unrest and COVID-19 headwinds, the group had seized the opportunity to cross-sell to them its back-office solutions which offers an avenue for savings over costlier manual processes. And of note, the increased contribution from back-office solutions has also helped N2N to cushion lower terminal subscriptions as brokerages have also been scaling back on branches to reduce costs.

Catalyst from Asia Trading Hub, BOS Replacement Opportunities, & M&A

Meanwhile, we continue to view near-to-medium catalysts for N2N from the Asia Trading Hub (ATH), back office system (BOS) replacement opportunities in Malaysia, and mergers and acquisitions.

Recall that the formation of the ATH is envisioned to make cross border more cost effective and seamless for all, especially the retail market. Thus, we expect N2N to benefit over time from: i) increased transaction-based fees, and ii) market share gains as non-panel brokerages switch over to its platform to benefit from the ATH’s capabilities. According to management, the group is also one step closer towards operationalising the ATH pending the appointment of an anchor broker which is required to function as a conduit between participating brokers.

For BOS replacement opportunities in Malaysia, management opines that it has not faded despite the long wait. This is because many brokerages are still on legacy systems which are costly to maintain and striving to keep up with evolving business demands. Moreover, we note that the group has also been actively participating in request for proposal from various parties including the stockbroking association.

As for mergers and acquisitions, management reiterated its interest in expanding N2N’s brokerage network in existing and newer markets across Asia via the inorganic route to accelerate growth. And we expect its ambitions to be well supported by its strong balance sheet with a net cash position of RM121.3mn as at end-3QFY20.

Impact

We make no changes to our earnings forecast.

Valuation & Recommendation

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 closely 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 from the ATH, BOS replacement opportunities in Malaysia, and strong balance sheet which would support M&A ambitions. Key downside risks include an unprecedented slowdown in trading activity, and lower than expected demand for system upgrade and implementation.

Besides, note 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 - 17 Dec 2020