Investors could react negatively to iFast Corporation’s FY2021 results, as PATMI missed consensus estimates by five percentage points, says Citi Research analyst Tan Yong Hong.
The FinTech company reported FY2021 PATMI of $30.6 million, up 45% y-o-y but reaching just 97% of Citi’s estimates and 95% of consensus estimates.
Operating profits saw a wider miss at 96% of Citi’s estimates and 94% of consensus estimates, writes Tan, driven by a 91% y-o-y decline in other income on lower government grants and investment losses.
In a Feb 15 note, Tan maintains “sell” on iFast, with an unchanged target price of $6.20 since Jan 27, trimmed from $7.50 on Jan 8. “Given weaker-than-expected earnings, we see potential downside risks to consensus earnings estimates,” he writes.
As at 12.07pm on Feb 15, shares in iFast are trading 12 cents lower, or 1.94% down, at $6.06. The counter traded at a 52-week high of $10.10 prior to its 3QFY2021 results in October.
The latest set of results, released after trading hours on Feb 14, confirms Tan’s “sell” thesis, he says, as iFast’s growth momentum for assets under administration (AUA) turned “muted” at 3.4% q-o-q, returning to pre-pandemic levels.
See also: iFAST net profit grows 44.8% in FY2021, AUA and net profit reach record-highs
For the full year, however, AUA grew 31.5% y-o-y to a record high of $19.0 billion as of Dec 31, 2021.
While profitability of iFast’s overseas operations in Hong Kong and Malaysia declined sequentially, they were partially offset by stronger Singapore operations. China operations AUA declined q-o-q and losses in that market widened to $1.6 million.
Tan also points to other negatives like ongoing pressure on platform margins. Net platform margins for B2B and B2C segments declined 8bps and 4bps respectively, which led to an overall 8bps decline to 60bps.
See also: Citi reiterates 'sell' on iFAST as share price plummets to eight-month low
But perhaps the most talked-about drag on earnings is iFast’s decision to acquire the UK-based BFC Bank, announced on Jan 7 and financed by a $103 million share placement that closed on Jan 10.
iFast expects the proposed acquisition to incur some initial start-up losses. Based on the group’s 85% stake in the UK digital bank, its estimated loss to the group for FY2022 is approximately $4.0 million.
iFast targets to achieve profitability for the UK bank from 2024. For now, “BFC Bank would be a further drag to FY2022-23F earnings”, says Tan.
Hong Kong could propel growth
With a target price of just $6.20, Citi’s Tan continues to sing a different tune from the street, which remains positive on what was once Singapore’s “best-performing stock”, even as consensus estimates have cut FY2022 earnings by 9% year-to-date.
DBS Group Research analyst Ling Lee Keng, for example, has kept “buy” on iFast in a Feb 15 note, but with a trimmed $10.85 target price from $11.37 previously.
The FY2021 results came in 5.7% below Ling’s estimates, but the analyst points to initiatives in place for longer term growth, with the group’s Hong Kong business set to propel growth from 2024. “Though some initial start-up losses are expected from the new initiatives, we maintain our positive view on iFast on the back of the strong growth momentum ahead, propelled by the Hong Kong business from 2024 onwards.”
Ling adds: “There is room for AUA to grow further. iFast is well poised to capture more market share in its key market Singapore, where its share is just 10% of the $128 billion in assets under management of the collective investment schemes.”
To recap, iFast is a subcontractor developing a centralised digital platform for the Mandatory Provident Fund, Hong Kong’s largest retirement scheme. The contract is for a two-year implementation period and a seven-year operation and maintenance period.
Ling forecasts the Hong Kong business to contribute 30% and 35% of total revenue in FY2024F and FY2025F respectively. Out of this, the ePension division will account for 70% of the total contribution from Hong Kong.
There is a possibility that the ePension division can start to contribute earlier than FY2024F, adds Ling.
For comparison, iFast’s Hong Kong business accounted for about 21.6% ($24.4 million) of the group’s total net revenue in FY2021, and 23.3% ($8.4 million) of total pretax profit.
China, too, could bring good news, says Ling. “China offers ample room for growth but losses are still growing. Pretax loss from China deepened to $5.8 million from $4.9 million in FY2020 though AUA crossed RM2 billion for the first time.”
“iFast believes that its China operation is well-positioned to capitalise on the future growth of the public mutual fund industry in China. The group will continue to seek possible opportunities to further expand the range of services and products in China via additional licences through direct applications or acquisitions,” Ling adds.
22.4% cut in target price
CGS-CIMB Research analyst Andrea Choong is choosing to "look past near-term headwinds", maintaining "add" on the stock but with a sizeable cut in target price to $9.70 from $12.50 previously.
"We believe that AUA is heading into a more normalised steady state of growth; unit trusts will play a more prominent role as stock-trading eases," writes Choong in a Feb 16 note.
Going forward, iFast’s ePension project will be its key earnings driver, she adds. "Contributions from the project will begin in FY2023F and are expected to scale up to help lift net profit from Hong Kong to approximately $57 million in FY2025F, from about $8 million in FY2021."
iFast had "conservatively" built in a six-month delay in the rollout of this project, writes Choong, and barring implementation challenges, the project may be brought forward.
Bid for Malaysia digital bank licence still on the table
Choong's target price cut brings the figure closer to that of UOB Kay Hian Research analyst Clement Ho. In a Feb 17 note, Ho is maintaining "buy" on iFast with a raised target price of $9.84 from $9.75 previously.
Ho points to a further potential catalyst in 1Q2022, when Malaysian authorities award five new digital banking licences.
iFast is leading a consortium which has submitted its bid for the licence. iFast will own a 40% stake in the partnership, with the remaining equity held by Malaysian partners Koperasi Angkatan Tentera Malaysia, THZ Alliance and Mr Lee Thiam Wah, as well as international partner Yillion Fintech.
"While earnings impact, if awarded, would not be significant in the near term, our view is that the award would spur iFast towards its 2028 $100 billion AUA target through expanding its breadth of product offerings. Over the longer term, a digital banking licence will lift interest income for the iFast ecosystem," writes Ho.
As at 9.31am on Feb 17, shares in iFast are trading 5 cents higher, or 0.79% up, at $6.41.
Photo: Albert Chua / The Edge Singapore
