N2N Connect Bhd
(May 21, 72.5 sen)
Maintain buy with a fair value (FV) of 95 sen: Stripping off foreign exchange (forex) impact, N2N’s first quarter of financial year 2019 (1QFY19) core net profit rose 23% year-on-year (y-o-y) to RM5.4 million.

 
However, it still fell short of our full-year forecast and market consensus accounting for only 19% and 21% respectively, largely due to lower trading activities in the local equity market.

While the company saw better cost control and reduction in overlapping licences from its Hong Kong subsidiary AFE Solutions Ltd (AFE), it was partially offset by lower average daily trading volume which decreased 15% y-o-y while traded value dipped 26% y-o-y.

Comparing quarter-on-quarter (q-o-q), N2N recorded a 39% jump in core net profit on the back of improved trading volume (+24% q-o-q) and value (+32% q-o-q) as 4QFY18 was plagued with negative global sentiment. On top of that, the cost savings from the AFE side has led to seven percentage points increase in pre-tax margin.

The company will continue to see improvement in margins as overlapping licences will be terminated progressively upon expiration.

N2N plans to launch a new digital platform in mid-FY19 based on blockchain technology. The digitalised platform allows trading of multiple financial instruments in one venue, including equities, derivatives and currencies.

This should provide better accessibility, improved liquidity and reduced transaction cost. We have not factored in any earnings contribution from this new digital platform as adoption may be slower-than-expected due to the current weak market sentiment.

Near-term earnings will be driven by the replacement of back office system (BOS).

The company is currently in talks with clients from the Philippines and several local brokers, and expects to secure two to three more BOS contracts this year with total value estimated at RM12 million to RM36 million.

Earnings contribution from this will be spread out until FY20, depending on the time of implementation.

The existing BOS system in local houses is not efficient enough to cope with new features, and with the implementation of new instruments such as the IDSS and T+2 settlement, the system needs to process transactions more frequently which necessitates an upgrade.

We continue to like N2N due to: i) its leading position in the online trading solutions 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, May 21