Friday 29 Mar 2024
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IT may not be an exaggeration to say that N2N Connect Bhd’s core business of providing a trading platform for stockbroking houses is equivalent to “a toll road concession”.

Some stockbrokers see N2N as a “toll collector” simply because it earns a fee for every transaction a dealer or remisier executes using its trading platform. The company’s direct market access (DMA) platform has the largest market share of over 70%.

This probably explains the hefty premium its share price is trading at now as well as its steady cash flow.

N2N (fundamental: 1.25, valuation: 0.7) had a clean balance sheet with cash of RM97.4 million, or 22.9 sen per share, and not much debt as at Dec 31, 2014, thanks to a share placement last year.

Tiang_N2N-Connect_29_1063“Yes, our PE (price-earnings) ratio is high [at 52 times], but it used to be higher. It was at more than 700 times [previously],” says managing director Andrew Tiang.

He adds that the PE ratio may not be a “fair reflection” of the company’s earnings, which are affected by R&D expenditure. “If we cut our R&D spending, our PE would look very good [at about 23 times].”

N2N’s share price rallied last year, more than doubling from 50 sen in early January to RM1.05 in May. It has since retreated from its peak, closing at 83 sen last Thursday.

For the financial year ended Dec 31, 2014, the company’s net profit rose to RM6.9 million from RM6.04 million in FY2013. Revenue also came in higher at RM34.2 million versus RM31.3 million. However, its earnings per share was lower at 1.86 sen due to an enlarged share capital as a result of the share placement, compared with 2.02 sen the year before.

The group went from making a loss of RM6.5 million in FY2010 to a net profit of RM6.9 million in FY2014. Meanwhile, revenue has more than doubled in the past five years.

In July last year, N2N raised over RM108.6 million from a placement of shares at 89 sen apiece to Nikkei Inc and QUICK Corp. Of the amount, RM56 million is to be utilised for mergers and acquisitions (M&A).

“We have identified several targets, both [public] listed and private [entities]. At this stage, we are in talks with some parties and will announce to Bursa Malaysia once we have something concrete,” says Tiang.

The type of assets the company is looking to acquire should be similar to its existing core business — providing DMA platforms and services to Bursa for local brokers and retailers.

While N2N’s DMA platform has the largest market share, the business is almost fully saturated and has little room to grow.

“We are very careful when we look at M&A. We do not want to overpay for assets,” says Tiang.

According to him, N2N will start rolling out its Pair Trading algorithm and low-latency trading services this quarter. It also plans to roll out QUICK, a trading terminal system, with its Japanese partners to take on incumbent trading and information service providers, such as Bloomberg and Reuters.

This could be an earnings growth catalyst for N2N.

The ultimate plan, Tiang says, is to offer the low-latency platform to other countries such as Hong Kong and Singapore where there is more demand. The company’s low-latency platform is certified in Hong Kong, Singapore and Australia, which means the system can be plugged directly into the exchange without having to go through intermediaries. In fact, the system is already being tested by traders in Singapore, he adds.

Pair Trading and low-latency services are expected to contribute to the company’s earnings from the third quarter onwards.

“Pair Trading is an algorithm we developed ourselves. In markets such as the US, algorithm trading is very common, but it isn’t in Asia. We are one of the first to develop something like this here,” says Tiang.

Pair Trading works by identifying and analysing correlations between assets such as stocks, currencies and commodities. The algorithm tries to identify divergences in these assets, where traders can short one and long the other, and close their positions out as the two converge again, he explains.

“Currently, we have over 12,000 users on our TC Pro system [trading platform] that is connected to our Order Management System. With the low-latency trading, we expect maybe one in four to switch over. It’s like paying a premium to get a boost of speed in your trading,” Tiang says, adding that the service has excellent synergy with its Pair Trading algorithm.

Earnings-wise, he expects a contribution of about RM1 million to RM2 million to Malaysia alone.

“N2N has a strong balance sheet, with virtually no borrowings. This gives us the room to invest in R&D for new products and the edge over our competitors,” he says, pointing out that the group invests about RM12 million each year in R&D.

Tiang expects the company’s investments in R&D to begin contributing to earnings by the end of the year.

Nonetheless, one of the biggest “investments” undertaken by the company in the past year has been in itself, in the form of share buybacks. Since July last year, when N2N completed the fundraising, it has been consistently and actively buying back its own shares on the market. It has purchased 4.2 million shares worth RM3.6 million in the past eight months.

“If we were trying to prop up the share price, it should be going up, not down,” Tiang quips. “We do it (share buybacks) because we believe in ourselves, and the value of the company.”


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.

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