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.

1HFY23 Has Remained Challenging

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.

2HFY23 Anticipated to Mirror 1HFY23

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.

Potential Catalysts: New Trading Platform & Asia Trading Hub

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:

• Asia Trading Hub. After much delay, the Asia Trading Hub is targeted to commence the pilot phase in 1Q24. To recap, the Asia Trading Hub will leverage N2N’s extensive network of brokers across Asia to facilitate cross-border trading across the related exchanges seamlessly and at a lower cost. We expect the channelling of such cross-border trades to offer upside and diversification to the group’s transaction-based revenue, which today is largely concentrated in Malaysia.

• New Trading Platform. Currently undergoing user acceptance testing towards its slated launch in 2H24, the new and enhanced trading platform is designed to offer users a more intuitive user experience. Notably, this includes the ability for users to conduct ultra-low latency trading, a feature which is expected to appeal to traders seeking a competitive advantage. If the value-added offering is well received by clients, we also expect it to present upside to the group’s managed services revenue.

Valuation & Recommendation

• 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, which is - 2.0SD to the stock’s 3-year average PE of 24.1x. The discounted target PE assigned is premised on the delay with growth plans, including the Asia Trading Hub. The key re-rating catalyst for the stock includes i) traction with the group’s upcoming Asia Trading Hub and new trading platform and ii) stronger-than-expected trading activity on Bursa Malaysia. We take this opportunity to cease coverage on N2N due to the underwhelming traction in its growth plans.

Source: TA Research - 6 Nov 2023