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Thursday, October 13, 2016

Brokers Report: N2N Connect Berhad - Synergistic Boost

Retain outperform recommendation with target price (TP) of RM1.08

The Group announced overnight that it has entered into a sales and purchase agreement with Reuters International Holding S.A.R.L. and Systex Capital Group Inc. for the acquisition of the entire equity interest in AFE Solutions Limited (AFE) for an initial purchase consideration of USD20.6m (RM85.3m), to be paid in sh. We are positive on the acquisition, and see the transaction as a value accretive and synergistic one, enabling the Group to fast track its regional expansion plans. We make no changes to our earnings estimates at this juncture until more milestones with regard to the conditions precedent are met (completion expected 1Q2017), though we would like to highlight a potential 30%-40% jump in forward earnings based on an average RM6.5m consolidation of AFE’s numbers. Our Outperform call is reaffirmed with a PE derived target price of RM1.08 premised on a 30x multiple to FY17 earnings per share of 3.60sen, the higher multiple justifiable in our view given the strong growth anticipated.
  • More on AFE. Incorporated in Hong Kong, the company is a financial data and trading solutions provider with presence in Hong Kong, Macau and Vietnam. Its group of companies offer customers, amongst which are stock brokerage firms, commercial banks, asset management companies and retail investors, a full suite of multi market and multi-instrument platforms for information, stock trading and settlement services. Though the AFE Group reported a RM714,000 loss for FY15, this comes as a result of equity-accounting a Thai associate’s RM7.47m share of losses, an entity which has been earmarked for disposal upon completion of the transaction, hence the absence of this drag going forward. Historical track record has been encouraging otherwise, a net profit of RM7.4m recorded in FY13, RM3.9m in FY14, RM6.7m (adjusted for the associate losses) in FY15 and RM2.4m up to May 2016.
  • Acquisition price based on an implied 8.5x price-earnings multiple is fair in our view, arrived at on the basis of AFE’s consolidated FY15 net profit of RM6.76m (adjusting for the associate’s share of losses), and cash holdings of about RM27.95m amongst others. With AFE, N2N is able to leverage on the former’s expertise in information solutions as well as its overseas customer base to complement its existing business and expand into new markets. Add to that the partnership with its 2 significant shareholders, primed to bear fruit through the development and rolling out of QUICK PRO in Japan and across Asia, the company’s growth potential is exciting. While the Group’s previously-healthy sh pile (c. RM112.5m as at 30 June 2016) will be markedly reduced, the company is still able to finance other value-enhancing M&A activities should any arise.

Source: PublicInvest Research - 13 Oct 2016

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