N2N’s top position in online trading solutions looks promising

TheEdge Wed, Nov 21, 2018 10:24am - 5 years View Original


N2N Connect Bhd
(Nov 19, RM1.15)
Maintain buy with an unchanged fair value (FV) of RM1.50:
Budget 2019 aims to widen the scope of the sales and service tax (SST).

On top of the proposed digital tax on imported consumer services (such as Spotify, Netflix and Steam) that will be implemented in 2020, there will also be a tax on digital services at the commercial level which will commence in January 2019.

This is to ensure that local service providers and its foreign competitors are on a level playing field.

Digital tax at the commercial level could potentially impact companies that rely on foreign digital services, such as web hosting, cloud storage, payment gateways and customer-relationship management.

Amazon Web Services (AWS), Dropbox, Shopify and Zoho are a few of many foreign suppliers that provide digital services to local companies but do not have a physical presence in Malaysia.

Operationally, N2N Connect Bhd does not rely on foreign web hosting services, such as AWS, to run its network. The company hosts its servers via third-party local service providers.

Instead, the concern may be N2N’s market data subscription (such as a consensus estimate, price quotes and volumes) from a foreign supplier, which could be subject to digital tax. The data is featured on its TCPro Global trading platform.

However, there are still many unanswered questions in regard to the framework and implementation of the digital tax system.

For instance, foreign digital service providers may not be compelled to be registered under our local SST system, and there will also be queries if the digital tax is passed on to customers.

Due to the ambiguity of this matter, management is unable to quantify the impact until further clarification from the government in December 2018.

Based on our back-of-the-envelope calculation, a 10% digital service tax on N2N’s market data subscription could potentially lower our financial year ending Dec 31, 2019 (FY19) core net profit forecast by 2% and subsequently reduce our FV by two sen to RM1.48.

Thanks to the accretive acquisition of AFE Solutions in FY17, we deem this to be negligible as N2N will potentially see greater savings from the termination of overlapping market data licences over the next one to two years upon expiry. Currently, market data subscription makes up about 25% of the entire group’s cost of sales.

We continue to like N2N due to: i) its leading position in the online trading solution space; ii) the acquisition of AFE, which offers tremendous earnings accretion; and iii) the affordability of TCPro Global, which could help the group win market share from global competitors, such as Bloomberg and Thomson Reuters. — AmInvestment Bank, Nov 19

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