N2N reported a 3QFY17 net profit of RM5.1m (+50.0% YoY, -48.8% QoQ), contributing to 9MFY17 net profit of RM18.7m (+103.6% YoY). This also includes unrealized foreign exchange gains on a USD loan and fair value changes on financial assets amounting to a cumulative RM6.1m however. Stripping these off, core 9MFY17 net profit is in line with expectations at 75% of full-year estimates. Hong Kong-based AFE Solutions Ltd (AFE) continues to make a difference to numbers, though we see more pronounced effects on profitability only in FY18 onwards as 2017 will be impacted by rationalization related costs. We continue to view N2N’s prospects favorably and retain our Outperform call on the stock. Our target price is raised to RM1.53 (RM0.92 previously) as we lift our PE multiple assumptions to 25x (from 15x previously). We had conservatively lowered it in the previous result review, but now believe that a higher multiple is justifiable as the Group continues to make inroads in extracting synergistic benefits which we think could contribute much earlier than expected. 2-year CAGR growth (FY17-FY19) is estimated at 36.5%, with scope for further enhancements on potential merger and acquisition-related deals. We leave our earnings estimates unchanged at this juncture however.
3QFY17. Revenue and net profit were slightly weaker sequentially owing to a noticeable decline in domestic market activity during the quarter, though partly helped by higher one time implementation fees, monthly fixed fees, variable matched trade fees and monthly subscription fees. On going contributions from AFE saw to a quarterly revenue of RM28.2m (+167.8% YoY) being recorded. The current quarter’s net profit also included certain one-off items, without which growth would only be +16.1% YoY, largely a result of rationalization-related costs as mentioned.
Future plans. Exciting times beckon for the Group as it sees merger and acquisitions as a key expansion strategy. The Group’s RM125m cash pile as at 30 September is certainly a handy sum and opens up a myriad of opportunities. The successful and value-accretive acquisition of AFE has given N2N extended reach and made it one of the largest Asian-based platform providers, has proven to be an early success going by the numbers. Given management’s acumen, we expect to see the same in future deals. Amongst other potential prospects being worked on include the provision of information service terminal, trading platform, data center hosting, network infrastructure and its latest back office settlement system in Malaysia, Thailand and Philippines.
Source: PublicInvest Research - 23 Nov 2017