KUALA LUMPUR: AmInvestment research cut its FY18F-20F forecasts on N2N Connect Bhd by 10% to 32% due to lower market velocity and higher tax rate assumptions.

It maintained its buy recommendation on the counter but reduced its fair value to RM1.35 a share from RM1.50 a share previously.

The research house said N2N's 9MFY18 core net profit of RM9.4mil came in below expectations at only 47% of its full-year forecast and 29% of consensus estimates.

Core profit in 3QFY18 came in at RM2.3mil which was 42% lower year-on-year and 17% lower quarter-on-quarter due to the slowdown in the local equity market.

"This is evident in the 8% QoQ fall in the local market trading volume, while 3QFY18 market velocity dropped to 30%. As a comparison, Q2FY18 and Q1FY18 recorded a market velocity of 36% and 35% respectively," said AmInvestment.

The research house said the higher tax rate in the quarter had taken a toll on earnings, with the bulk of it accounting for the previous year's unpaid tax.

"However, management guided this will not recur in the subsequent quarter," said AmInvestment.

"We believe the long-term prospects of N2N are still intact given its potential strategic collaboration with SBI Holdings (SBI). 

"Recall that the two parties intend to develop a blockchain-enabled platform to digitalise the trading of multiple financial instruments in one venue, including equities, derivatives, currencies, etc," it added.

Near-term growth is expected to be driven by an industry-wide replacement of back office systems (BOS).

The research house said most brokers' BOS are overdue for a replacement while the increasing complexity of trading procedures such as for short-selling requires a more advanced BOS.

"N2N is currently among 4 bidders tendering for the work to replace BOS for brokers. There are currently 28 brokers in Malaysia, and a traditional BOS typically costs RM8-12mil," said AmInvestment.