Key takeaways from our recent meeting with N2N’s management: i) N2N’s revenue profile has stabilised to one with a stronger mix of recurring revenue (~90%) versus variable revenue (~10%), ii) in the near-to-medium term, potential catalysts for N2N include the launch of the Asia Trading Hub (to commence pilot phase in 1Q24), and a new trading platform (to launch in 2H24). In all, we maintain our Sell recommendation on N2N with an unchanged TP of RM0.35 based on a target PE of 17.0x against CY24F EPS. We take this opportunity to cease coverage on N2N due to the underwhelming traction in its growth plans.
Thus far, in 2023, N2N has remained confronted with a challenging operating environment. To recap, 1HFY23’s revenue and core net profit declined 4.7% YoY and 38.3% YoY to RM50.4mn and RM4.0mn, respectively. The weaker performance was attributed to i) lower one-time implementation revenue, ii) lower financial information terminal revenue (as some brokerages in Hong Kong terminated their subscription to rationalise costs), iii) lower transactionbased revenue (amid the normalisation of trading momentum on Bursa Malaysia), and iv) higher operating expenses (from the expansion of headcount for research and development on artificial intelligence powered solutions). However, the weaker performance was cushioned by higher interest income and a lower share of losses of an associate.
Of note, as the capital market trading frenzy observed during the pandemic has normalised, N2N’s revenue profile has also stabilised to one with a stronger mix of recurring revenue (i.e., managed services) versus variable revenue (i.e., transaction-based). For perspective, recurring revenue and variable revenue currently account for ~90% and ~10% of the group’s revenue, compared to ~77% and ~23% during the pandemic. Anchored by its predominantly recurring revenue profile, we anticipate N2N’s performance in 2HFY23 to mirror 1HFY23’s. Accordingly, we also maintain our forecast for FY23’s revenue and core net profit at RM99.1mn (-3.8% YoY) and RM8.2mn (-46.4% YoY).
By markets, Malaysia and Hong Kong remain N2N’s key contributors as they each account for ~40% of the group’s revenue. Management shared that for Malaysia, drivers for the existing business include client requests for system upgrades. As for Hong Kong, to cushion the impact of lower financial information terminal subscriptions, efforts are ongoing to transition clients to the managed services model.
In the near-to-medium term, management is looking forward to potential catalysts from the launch of i) the Asia Trading Hub and ii) a new trading platform:
Source: TA Research - 6 Nov 2023
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