AmInvestment Bank initiates coverage on N2N Connect with ‘Buy’ rating

• New product to strengthen income stream and regional market cap
• Core net profit to grow at CAGR of 32% from financial year 2017 to 2020

AMINVESTMENT Bank initiates coverage on N2N Connect (N2N) with a Buy rating and fair value of RM1.52. Including an expected dividend yield of 3%, the stock offers an implied upside of 49%.

The bank-backed research house views N2N favourably due to:

• Its leading position in the online trading solutions space;
• The acquisition of AFE Solutions (AFE), which offers tremendous earnings accretion; and
• The affordability of TCPro Global, which could help the group win the market share from global competitors such as Bloomberg and Thomson Reuters.

Based on these reasons, AmInvestment projects N2N’s core net profit to grow at a compound annual growth rate (CAGR) of 32% from RM16 million in FY17 through to FY20F.

As trading volumes in Asian financial markets have been on a long-term upward trend, the research house suggests that N2N is expected to benefit from this increased regional trading activity and ride the long-term growth of the financial markets.

N2N’s revenue is reported to have more than doubled in FY17 at RM97.3 million with an increase of 36% in core net profit to RM16 million after a nine-month consolidation of AFE’s results. In 2016, N2N reported a revenue of RM41.8 million and core net profit of RM11.7 million.

As for N2N’s acquisition of AFE, the report says, “We believe the market has not fully priced in major earnings boost from the acquisition of AFE Solutions last year.” AmInvestment expects the N2N’s earnings to further accelerate going forward as the group reaps the benefits from the acquisition.

The report notes that the acquisition allows N2N to:

• Cross-sell its mobile trading platforms to AFE’s clients in Hong Kong;
• Terminate overlapping data licenses; and
• Reduce other unnecessary overheads, including relocation of its HK premises to reduce rental expenses by HK$2.3 million and consolidation of workforce.

According to the analyst report, N2N’s TCPro Global, an integrated financial trading platform co-developed with Nikkei back in 2014, is set to take off in the coming years enabling the company to compete on a regional scale.

N2N introduced piecemeal functionality upgrades for users to selectively unlock key features instead of having to pay full price for the full suite upgrade. “As TCPro Global becomes more affordable, we expect to see more take-ups for the product going forward,” the report notes.

The report also says that N2N’s management has informed AmInvestment about plans to pursue fast-track rollouts of this new product through horizontal acquisitions, further growing its market share in the region. AmInvestment affirms that the group’s ambition is supported by N2N’s strong net cash position of RM86 million as at March 31, 2018.

In terms of near-term performance catalysts, the Main Market transfer angle and an industry-wide replacement of back-office systems (BOS) is expected to spur further growth.

The report also notes there is a Main Market transfer angle to N2N given that its profit track record adequately satisfies Bursa Malaysia’s “profit test” requirement.

N2N’s recorded a net profit of RM25 million in FY17 and a three-year aggregate net profit of RM46 million stands up well against Bursa’s required net profit of RM6 million for most recent financial year and an uninterrupted three-year aggregate net profit of RM20 million.

According to AmInvestment, “The transfer would open the door to investing in N2N for market participants which are prohibited from purchasing ACE market counters.” In turn, the transfer is expected to improve liquidity in trading of N2N shares and boost company profile.

Additionally, AmInvestment sees a potential earnings kicker from an industry-wide replacement of BOS. The demand for N2N’s BOS is expected to rise in the near term due to increased complexity in trading procedures which requires a more up-to-date BOS creating a new recurring income stream for the group.

“Currently, we understand that most brokers’ BOS are 15-25 years old and a replacement is long overdue,” says the report.

Having said that, N2N remains vulnerable to certain risks. In terms of exposure to foreign exchange risk, appreciation of the US$ will adversely affect N2N due to unhedged US$-denominated net monetary liabilities amounting to approximately RM54 million in 2017.

However, AmInvestment says that this exposure is partially offset by earnings contribution from AFE which will benefit from appreciation of HK$ as it is pegged to the US$.

As for N2N’s ability to retain and secure new contracts, the report says “The group has established longstanding relationships with its clients. Hence, the group should face no major setbacks in renewing contracts.”

About political and regulatory risks, the report highlights that N2N is bound to adhere to the rules set out by the respective regulatory bodies in its recently-acquired AFE operations in Macau and Vietnam.

“Any adverse development in the economic, political and regulatory conditions in these regions would have negative implications on the group,” AmInvestment says.

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