Review

• N2N’s 1HFY23 core net profit of RM4.0mn (-38.3% YoY) came below our full-year estimates at 42.2%. The miss was due to higher-thanexpected operating expenses.

• N2N declared a 1st interim dividend of 1.0sen (1HFY22: 1.0sen).

• YoY. 1HFY23’s core net profit contracted 38.3% YoY to RM4.0mn on lower revenue and higher operating expenses, albeit cushioned by higher interest income and lower associate losses. Revenue weakened 4.7% YoY to RM50.4mn on i) lower one-time implementation revenue, ii) financial information terminal revenue, and iii) transaction-based revenue amid softer trading momentum on Bursa Malaysia.

• QoQ. 2QFY23’s core net profit declined 36.7% QoQ to RM1.3mn despite higher revenue due to increased operating expenses, including salaries. Revenue grew 2.5% QoQ to RM25.5mn on higher one-time implementation revenue.

• N2N maintained a strong balance sheet with a robust net cash position (including other investments) of RM155.6mn or 27.9sen (+3.4% QoQ, +17.5% YoY).

Impact

• We have cut our FY23F/FY24F earnings estimates by 13.7%/4.8% upon raising operating expenses to reflect actual 2QFY23 results.

Outlook

• We foresee N2N continuing to exhibit YoY weakness in 2HFY23 amid persistent macroeconomic headwinds, which is expected to keep trading momentum soft. That said, there is an upside to capital market activities, market vibrancy, and ongoing initiatives to attract trading and IPOs.

• Meanwhile, we continue to view near-to-medium catalysts for N2N from i) system upgrades, especially with the imminent need for many brokerages in Malaysia to upgrade their ageing back-office system, and ii) potential market share gains across Asia, aided by its upcoming Asia Trading Hub and ambitions to pursue mergers and acquisitions.

Valuation & Recommendation

• Corresponding to our earnings downgrade, our TP for N2N is revised lower to RM0.35 (previously RM0.37) based on a target PE of 17.0x against CY24F EPS, which is >-2.0SD to the stock’s 3-year average PE of 27.1x. Maintain Sell. The key rerating catalyst for the stock includes a pickup in trading activity and traction with the group’s Asia Trading Hub.

Source: TA Research - 25 Aug 2023