This article first appeared in The Edge Malaysia Weekly on April 9, 2018 - April 15, 2018

A year after completing its US$20.59 million acquisition of Hong Kong-based AFE Solutions Ltd, N2N Connect Bhd is ready to harmonise the two businesses and make the most of any synergies.

“When we buy a company of a similar nature, we want to be able to harmonise [the two], so we will be looking at ways to rationalise costs in order have a combined product line,” N2N managing director Andrew Tiang tells The Edge in a recent interview.

N2N is one of the largest providers of online real-time trading platforms for capital markets in Malaysia, serving 70% of brokerages. Financial data and trading solutions provider AFE serves about 40% of the brokerages in Hong Kong, and 35% in Vietnam.

Where N2N and AFE differ in their modus operandi pertains to revenue recognition, as well as the type of clients they cater for.

“AFE has two businesses: one is its financial information services [such as world indices and Thomson Reuters Great China News] and the other is its trading solutions,” says Tiang.

“In Hong Kong, there are three main segments of brokerage firms that AFE serves. Segment A are the institutional brokerage firms, whereby AFE only provides information services but not trading products, while Segment B comprises retail brokers [which AFE’s trading products caters for].

“Segment C are your mom-and-pop brokers or family-owned brokerages — they basically manage their family investments. Out of 500 brokerage firms in Hong Kong, about 380 are in Segment C.”

In Malaysia and countries where it operates such as Singapore, Indonesia and the Philippines, N2N derives its revenue from a fixed monthly management fee for its managed services, while alternate income is derived from fees charged for every matched trade order executed via its online trading system. More than 90% of N2N’s revenue stream is recurring.

“As for AFE clients in Hong Kong, Macau and Vietnam, they are on a rental model. We will offer N2N services in these countries so that clients have a choice to move to N2N services and adopt our revenue model,” Tiang explains.

“AFE has many clients but they are confined to certain segments of business. This is where N2N comes in as we will be able to allow them to expand their segments because our solutions spectrum [is wide].”

Apart from its regional expansion, Tiang says N2N will focus on enhancing its product offerings this year, in particular, its mobile initiatives.

“Nowadays, the trend for trading is by using mobile phones and tablets, so we are looking at more mobile initiatives to cater to this new lifestyle.

“Another avenue we will look at is the provision of back-office systems. Most of the systems being used now are probably about 25 years old and expensive to maintain, so a lot of brokers are looking to replace them.

“Also, whenever there are modifications to trading procedures, for example, the recent Bursa Malaysia measures such as the stamp duty waiver for small and mid-cap stocks and a six-month waiver on trading and clearing fees for new investors, the back office needs to keep track of them. In short, there is a demand to enhance back-office services, which we can provide.”

Tiang adds that the group will also look at rolling out robotic trading services.

“Robotic trading is a computer program that can analyse and make decisions on the best actions you can take when it comes to trading. It will look into fundamentals such as earnings of a stock, technical trends, market performance and so on.”

Solid financials and a strong cash pile

In terms of financials, N2N enjoyed a bumper year last year thanks to the consolidation of AFE’s earnings from April 1 last year. For the full financial year ended Dec 31, 2017 (FY2017), group net profit more than doubled to RM25.13 million from RM11.75 million in FY2016. Revenue in FY2017 surged to RM97.28 million — a record high — from RM 41.82 million in FY2016.

“Last year, we only recognised nine months of AFE’s earnings, so this year, our revenue numbers will definitely breach the RM100 million mark. Our bumper 2017 in terms of profit was mainly driven by forex gain as when we acquired AFE, the ringgit was trading at 4.50 to the US dollar, and now it is at 3.90 levels.

“This year, we expect more concrete results from actual business returns. We are on a solid growth path, and we expect to sustain that level with our recurring business model.”

As at Dec 31, 2017, N2N had cash and cash equivalents of RM53.16 million and investments in unit trusts amounting to RM43.78 million while its total borrowings stood at RM69.32 million. Its gearing ratio stood at a comfortable 36%.

“Although we are a cash-rich company, we are also very careful and selective in our spending,” says Tiang, who together with his wife — N2N executive director Jovelyn Lai Su Ping — controls some 37% of the company via N2N Connect Holdings Sdn Bhd, as well as their respective personal stakes. Another 26% is collectively held by Nikkei Inc and Quick Corp.

In the current fiscal year, N2N declared a first interim dividend of three sen per share, which it paid out on March 28, which was more generous than the one sen paid in FY2017 and FY2016, and the two sen in FY2015.

On March 16 — the entitlement date for the first interim dividend — Tiang and Lai, via N2N Connect Holdings, disposed of 22.58 million shares or a 4.2% stake in the company. On the same day, the couple’s privately held vehicle also exercised 44.03 million warrants.

Since the transactions, N2N’s share price has dropped 27%, falling from 92 sen on March 16 to 67 sen last Wednesday, giving it a market capitalisation of RM358.26 million.

According to Bloomberg, the company is trading at a historical price earnings ratio (PER) of 12.52 times, and a forward PER of 10.98.

“I have been told by fund managers that a company in our segment of business should be valued at something like 30 to 35 times. In other words, we are undervalued. But I think I would only be concerned about this if I am selling my shares, which I am not,” says Tiang.

Currently listed on the ACE Market of Bursa Malaysia, N2N is eyeing a transfer to the Main Market although Tiang says there is no definite timeline.

As the group’s Pan Asian plan is falling nicely into place, he is looking to expand into Europe, hoping to leverage on the European Union’s measures to unify its capital markets ahead of Britain’s exit next year.

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