In July, I wrote about iFAST and pointed out that its stock price has risen significantly faster than its fundamentals. Its stock price went on to rise steadily since; that is, until recent months when it fell back to where it was in July.
Knowing this, can we say that iFAST’s fundamentals have caught up to its share price?
Furthermore, iFast has signalled its potential entry to Europe. Given that, how much value would the Europe digital banking license bring to iFAST?
What is iFAST?
First, let me give you a quick overview of what iFast does. iFast Corporation is a wealth management fintech platform that serves three main business areas:
- Business-to-Consumer (B2C): FSMOne.com (previously “Fundsupermart”), a multi-product online wealth management platform that provides DIY investors access to a myriad of investment products.
- Business-to-Business (B2B): Provide financial products to over 540 financial advisories (FA) companies, financial institutions, and banks.
- Emerging Fintech Solutions / Business-to-Business-to-Consumer (B2B2C) Model: Equip its B2B clients and business partners with B2C Fintech capabilities along with customised Fintech solutions.
Overall, iFast (SGX:AIY) provides access to over 13,000 investment products. This includes 8,600 funds, 1,400 bonds, stocks, and ETFs listed on the Singapore, Hong Kong, and US stock exchanges. It also offers services such as portfolio management, investment seminars, Fintech solutions, and investment administration and transaction services.
Europe Digital Banking License
During an interview with the Business Times, Chief executive Lim Chung Chun said that Europe would be one of the jurisdictions considered as part of the company’s plans to pursue more licenses.
This move comes as he believes that iFast can fully realise the digital banking segment with its inherent link to wealth management.
The business value of a digital banking license in Europe
Before we go any further, I’d like to point out that iFAST has been denied digital banking licenses in Hong Kong and Singapore. Nevertheless, let us not place too much weight on this, as European regulators may be more willing to allow non-traditional businesses to enter the market.
iFAST has not specified particular targets, timelines, or countries for the licenses it wishes to apply for. However, I believe that once it establishes a foothold in one of Europe’s markets, it will be relatively easy to expand its services to all EU member states. This will allow it to gain access to one of the world’s largest financial markets, with 450 million people and 20 million businesses.
Under-served groups such as SMEs, unbanked, freelancers, startups, and millennials are predicted to drive this market to more than S$600 billion in value by 2026, with a CAGR of 46.5%. As such, there’s a lot of potential that iFAST can tap into.
iFast’s competition in Europe
However, we must keep in mind that iFAST would not be the only player. Unlike ASEAN, Europe has a more developed Fintech sector, with companies such as Revolut Fidor, Simple, N26, and Monzo already commanding a chunk of the market.
To understand the scale of competition, let us consider Revolut, one of Europe’s largest digital banks. It has over 15.5 million users as of June 2021, with 1.1 million utilising the app daily. While the company is still losing money, its revenue has been increasing. In 2020, it reached £221 million, yielding a 57% increase over the previous year.
In addition to Revolut, Statista studied six app-only digital banks. They have around 40 million combined IOS and Android downloads, and this number only continues to rise.
Can iFast break into the Europe markets?
So, if iFAST wants to get into this market, what can they provide that no one else can?
All of this will have to wait until the company makes a more specific announcement about its European strategy. On the plus side, this is a growing sector. While there are currently several players, even if iFAST were to pick up the crumbs, it could still make a profit there if executed well.
As we can see, Revolut is still losing money despite its rapid growth. Furthermore, iFAST is still attempting to expand into China, a pursuit that is also losing money. Is it possible for this company to develop both large markets at the same time? Should they concentrate on just one country at a time?
To answer that, we must first determine if iFAST has a robust balance sheet to support this expansion.
iFAST 3Q2021 Earnings
iFast announced its third-quarter results on 23 October 2021, resulting in a 10% drop in its stock price. This can most likely be attributed to overestimation of their performance.
Assets Under Administration (AUA) and Income
iFAST’s Assets under Administration (AUA) continue to achieve new highs, reaching S$18.38 billion as of 30 September 2021. This amounts to a 46.1% year-on-year increase and a 27.2% year-to-date increase.
As a result of the increasing AUA, iFAST recurring net revenue has continued to thrive.
It grew 29.7% year on year in 3Q2021 and 32.7% year on year in 9M2021. Meanwhile, total net revenue increased by 38.1% year on year to S$84.99 million in 9M2021. This includes both recurring and non-recurring revenue. Net profit rose 63.6% year on year to S$23.43 million in 9M2021.
What’s impressive is that the company’s revenue growth is outpacing its operating expenses. As a result, while revenue increased by 32.5%, operating income had increased by 59.2%. This can be seen in their margin, which is at 32.7% for 9M2021; its highest level in the last five years!
When it comes to geographical segments, let’s look at Singapore, iFast’s largest market share at the moment, and China, which is on the rise.
- Singapore
iFAST Singapore operation’s net revenue climbed by 21.2% year on year to S$18.18 million in 3Q2021 and 36.9% year on year to S$54.90 million in 9M2021.
As of 30 September 2021, the AUA for the Singapore operation has increased by 53.5% year on year and 6.8% quarter on quarter to $13.01 billion.
- China
Its China operation’s net revenue had also increased at 13.9% year on year to S$0.66 million in 3Q2021 and 69.5% to S$1.88 million in 9M2021. This is despite the China’s market uncertainty, brought about by the government crackdowns, power shortages, and a property-market debt crisis.
While Singapore presently accounts for 70% of AUA, iFAST believes that by 2028, Singapore’s AUA share will be less than 50%. Nonetheless, it may take some time for the China segment to become profitable, seeing as it took seven years for Hong Kong and Malaysia to reach that point.
Balance Sheet
In terms of debt, iFAST’s liabilities have fallen marginally as of 30 September 2021, standing at $142 million.
Cash, cash equivalents, and investments in financial assets grew to $54.44 million at the end of September 2021, up from $53.28 million at the end of 2020.
Finally, current assets increased from $194.60 million on 31 December 2020 to $200.90 million on 30 September 2021.
Cashflow
Cash is king, and cash flow reflects how much money the company receives. Operating cash flow remains strong. However, at this rate, full-year cash flows in 2021 could only match those in 2020.
This contrasts with the increase in net income and can be blamed on higher income tax, employee bonus payments, and cross-quarter working capital movement. While there is no need to be concerned, we should expect iFAST cash flow to keep pace with revenue growth moving forward, barring any unforeseen circumstances. If this situation persists, it could be a red flag, and investors should keep a close watch.
Dividend
iFAST also pays dividends to its shareholders. A dividend of 1.30 cents per ordinary share was paid in the third quarter of 2021, up 62.5% from a year ago. Taking into account past quarters, this translates to a dividend yield of 0.51% (TTM).
But, to be honest, I’d rather they retain it and expand their business.
(If you like dividend stocks, this may be a better way to select SG stocks)
iFast’s Five Year Plan
As part of its results, iFAST has also laid out a Five-Year Plan. This 5-year plan emphasised four main objectives: getting bigger and better, accelerating Hong Kong’s growth, pursuing new licenses, and developing a truly global business model.
1) Get bigger and better
To begin, iFAST will seek to expand its Fintech wealth management platform’s scope and quality.
Concurrently, it remains committed to reaching its target of S$100 billion in AUA by 2028. Based on its current AUA of S$18.38 billion, this would suggest a compound annual growth rate (CAGR) of about 27%.
2) Accelerate growth in Hong Kong
Second, iFast aims to greatly accelerate its overall Hong Kong business in the next five years, particularly in 2024 and 2025.
This will be done as it implements the ePension business and expands its existing platform capabilities. If you recall, iFAST recently finalised a prime subcontractor contract for the Hong Kong pension project, also known as eMPF, which attempts to automate MPF scheme administrative processes (MPF is comparable to Singapore’s CPF).
As promised, the company has now provided some guidance, stating that the new segment will begin contributing significantly in 2023/2024. In terms of gross income, iFast aims to exceed HKD 1 billion in 2024 and HKD 1.5 billion in 2025. It plans to generate HKD 800 million in net revenue in 2024 and HKD 1.2 billion in 2025. Finally, in terms of PBT Margin, it is expected to reach 33% in 2025.
With a net revenue of HKD 1.2 billion (S$208.1 million) and a target PBT margin of 33%, the Hong Kong business may generate a PBT of up to S$68 million. This is significantly higher than its present PBT of S$6.35 million and the whole group’s PBT of S$25.4 million.
3) Pursue more financial licences
Third, iFAST is pursuing additional financial licenses in various jurisdictions while making strategic investments in related Fintech technologies. Digital banking is one of the services that is directly tied to wealth management. This is related to the previous discussion about its European ambitions.
Becoming a ‘marketplace for bonds’, especially for small investors, is another possibility iFast is looking at. Moving forward, the company will provide periodic updates on its efforts to obtain various licenses in various jurisdictions.
4) Global business model
The final goal sounds like a rehash of the first three. iFAST aspires to make significant progress toward its goal of becoming a leading Fintech wealth management company with a truly global business model aimed at assisting investors.
To accomplish this, it hopes to continue extending its worldwide Fintech ecosystem. It also aims to improve overall global connection while complying with the jurisdictions’ legislation and compliance standards.
iFAST’s Valuation
Back in July, I felt that iFast share price ran up much faster than its fundamentals. Now that we see more growth in their revenue, can iFast be considered cheap now?
Unfortunately, with a PE of 79, the iFAST stock still has a high price-to-earnings ratio (compared to 81 back in July). Even after accounting for growth, PEG remains at 1.2. A PEG ratio of less than one is usually linked with an undervalued company, while those above are considered overvalued.
Finally, fair value from finbox models suggests a price of S$6.39 per share, which is a 28% markdown from the current price.
Concluding Thoughts
We can see from these metrics that investors are still factoring in future growth and that sentiment hasn’t changed. It’s understandable, given how fast iFAST is growing and how valuable the Hong Kong market will be in the future.
All of this, combined with a potential announcement of licensing in Europe, might push an already overvalued company even higher. That being said, the risk-to-reward ratio does not appeal to me. I do not have a position in it.
What are your thoughts? Is it possible for iFAST to keep climbing?