N2N earnings seen impacted by higher tax rate
KUALA LUMPUR: AmInvestment research has cut its financial year 2018-2020 (FY18-FY20) forecasts on N2N Connect Bhd by 10% to 32% due to lower market velocity and higher tax rate assumptions.
It has maintained its “buy” recommendation on the counter but reduced its fair value to RM1.35 a share from RM1.50 previously.
The research house said N2N’s core net profit of RM9.4mil for the first nine months of FY18 came in below expectations, at only 47% of its full-year forecast and 29% of consensus estimates.
Core profit in the third quarter of FY18 came in at RM2.3mil, which was 42% lower year-on-year and 17% lower quarter-on-quarter (q-oq) due to the slowdown in the local equity market.
“This is evident in the 8% q-o-q fall in the local market trading volume, while market velocity for third-quarter FY18 dropped to 30%.
“As a comparison, second-quarter FY18 and first-quarter FY18 recorded a market velocity of 36% and 35%, respectively,” it said in a report.
The research house said the higher tax rate in the quarter had taken a toll on earnings, with the bulk of it accounting for the previous year’s unpaid tax.
However, management guided this would not recur in the subsequent quarter, it said.
“We believe the long-term prospects of N2N are still intact, given its potential strategic collaboration with SBI Holdings.
“Recall that the two parties intend to develop a blockchain-enabled platform to digitalise the trading of multiple financial instruments in one venue including equities, derivatives and currencies,” it added.
Near-term growth is expected to be driven by an industry-wide replacement of back office systems (BOS).
The research house said most brokers’ BOS are overdue for a replacement while the increasing complexity of trading procedures such as for short-selling required a more advanced BOS.
“N2N is currently among four bidders tendering for the work to replace BOS for brokers. There are 28 brokers in Malaysia and a traditional BOS typically costs RM8mil to RM12mil,” it said.