Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Dec 2022, 10:52 AM


IFAST Corporation 3Q22 - Fostering Long-term Growth Amid Market Challenges

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  • iFAST’s 3Q22 earnings (-73% y-o-y) missed our expectation due to lower-than-expected revenue and continued elevated investment costs. AUA continued to fall to S$16.98b (- 7.6% y-o-y, -3.9% q-o-q), as equity and bond markets face volatility.
  • Management expects profitability to decline in 2022, with flat net revenue and higher opex from future launches. We trimmed our 2022 and 2023 earnings by 71% and 27%.
  • Maintain HOLD rating on iFAST with a 30% lower target price.

IFAST's 3Q22 Results Remain Weak

  • For 3Q22, iFAST (SGX:AIY)’s net revenue softened 1.3% y-o-y to S$30.1m, mainly due to a 38.5% y-o-y fall in non-recurring net revenue, following the decline in both investment subscriptions and trading volume from market volatilities. This was partially offset by a 5.9% y-o-y rise in recurring net revenue, as a result of higher interest income from a rising interest rate environment. 3Q22 opex increased 33.6% y-o-y to S$27.6m as platform enhancement efforts ramped up and the new UK-based banking operation continues to expand. Correspondingly, PATMI declined 72.6% y-o-y.
  • iFAST declared a similar 3Q22 dividend of 1.3 cents as 3Q21, representing a 183% payout ratio (3Q21: 47.4%).
  • AUA continued to see a decline in 3Q22. Assets under administration (AUA) for iFAST declined sequentially to S$16.98b (-7.6% y-o-y, -3.9% q-o-q), mainly from the Singapore operation, its core market experiencing a fall to S$12.3b (-5.3% y-o-y. -1.9% q-o-q). With the continuous fall from 4Q21 (1Q22: -2.0%, 2Q22: -5.1%) and AUA being its main driver, profitability for the year is likely to decrease.

Near-term Earnings Growth Dampened in Capricious Market

  • The negative market environment has led to a 12.6% y-o-y and 9.8% y-o-y decline in the B2C and B2B divisions of the non-banking operations respectively. This is mainly due to the decline in AUA, leading to a fall in recurring fees on investment products during the quarter.
  • Lesser trading activities and decreased investment subscriptions have also translated to lower transaction processing fees and service fees earned. While this has been offset by greater interest income on the cash portion of the group’s decreased AUA, iFAST’s earnings are largely affected by the unpredictable market conditions.

Operating Expenses Increase Upon Upcoming New Launches

  • The building of iFAST Global Bank’s new product offerings including a personal digital banking platform has recorded an S$2.17m initial start-up loss in 3Q22. Moreover, preparations for future business growth have brought about an 11.2% y-o-y increased expenditure on technology services during the year. This has largely contributed to the group’s lowered profitability during the year.

New UK-based Banking Operation and Hong Kong (HK) EPension Division to Bring in Greater Earnings in 2023

  • iFAST Global Bank has contributed an average of 10.3% in net revenue since its acquisition in March this year. Management continues to scale up the banking operation, with plans to introduce new product offerings over the next two quarters.
  • Additionally, the HK ePension project, which was executed in Jul 21, is slated to begin operations in 2023 and is not subject to market changes. The group’s net revenue is therefore expected to be boosted in the coming year.
  • According to management guidance, net revenue for its overall HK business in 2023 and 2024 is forecasted to be S$50.2m and S$161.3m respectively, while contribution from the ePension division will begin in 3Q23, pushed forward from 4Q23. As the ePension division is likely immune to market volatility, iFAST’s results are forecasted to improve in the long term.

IFAST – Earnings Forecast Revision and Recommendation

  • We cut our 2022 revenue and earnings forecast for iFAST by 22% and 71% to account for the weaker-than-expected revenue and earnings due to weakness in AUA from poor market condition and elevated opex to fund new launches.
  • We have adjusted our 2023 and 2024 operating expenses estimates based on iFAST’s earnings market sensitivity and expected earnings growth. From S$169.8m and S$303.8m in 2023 and 2024 respectively, we have adjusted our revenue estimates by -9% and +1% to S$154.5m and S$306.2m. Accordingly, net profit estimates for 2023 and 2024 have been adjusted by -27% and +1% to S$35.1m and S$116.7m respectively.
  • Maintain HOLD recommendation on iFAST with a lower PE-based target price pegged to 30x 2023F P/E, or 0.5 standard deviation below its 5-year mean.
  • We revised down our valuation multiple peg from +2 standard deviation above mean previously to account for the near-term earnings weakness and poorer market condition for tech stocks amid the rising interest rate environment. Despite near-term headwinds, we believe iFAST has significant scalability in the Hong Kong and the UK markets, which would boost earnings in the coming years.

Source: UOB Kay Hian Research - 28 Oct 2022

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