N2N Connect Bhd
(Nov 18, 76 sen)
Retain outperform call with a target price (TP) of RM1.08: Our “outperform” call is retained with an unchanged price-to-earnings derived-TP of RM1.08 premised on a 30-times multiple to financial year 2017 (FY17) earnings per share of 3.6 sen, with the higher multiple justifiable in our view given the strong growth anticipated.

The group’s nine months of FY16 (9MFY16) net profit of RM9.2 million came in below expectations, making up only 69% of our full-year estimates, in large part owing to our anticipation of stronger contributions from its Philippines-related venture.

While we are also lowering contributions from its Australia-related venture, the incorporation of recently acquired AFE Solutions Ltd’s numbers will see our earnings forecast largely unchanged for FY17 owing to rationalisation costs and FY18 forecast raised by 40% owing to synergistic benefits. Its FY16 net profit expectation is lowered by 4.4% to RM12.2 million.

On AFE, we are positive on this recent value-accretive transaction which enables the group to fast track its regional expansion plans. Though having seen its market share eroded in recent years, AFE remains the only company in Hong Kong that offers a full range of Hong Kong Exchange (HKEX) market data through HKEX’s hosting services, making it the fastest, most reliable and all-inclusive service provider.

The group is confident of deriving synergies and lifting AFE’s medium- to longer-term growth prospects via upselling its current products to AFE’s existing customers, benefitting from tax savings through royalty charges paid and cost rationalisation through savings in telecommunication, equipment rental, maintenance and licensing-related fees amongst others.

With AFE as part of the group, N2N’s coverage now includes Malaysia, Singapore, Indonesia, the Philippines, the US, Hong Kong, Macau and Vietnam.

The partnership with its two significant shareholders, which are Nikkei Corp and Quick Corp, is primed to bear fruit through the development and rolling out of QUICK PRO in Japan and across Asia, underscoring the company’s medium-term growth potential.

While the group’s previously-healthy cash pile will be reduced somewhat, the company remains open to other value-enhancing merger and acquisition activities, which it can still easily finance.

Incidentally, management has stated that the company expects to close in on a few more acquisitions in the coming months to establish a Pan Asian presence and network of inter-broking activities powered by its latest platform, developments we keenly anticipate. — Public Invest Research, Nov 18