iFAST (SGX:AIY) – Betting On A Fintech Future

Company Background

Some of you might be using FSMOne to buy and sell unit trusts, ETFs, stocks, bonds or even invest in their managed portfolios. FSMOne is just one of the services provided by iFAST.

The B2C division caters to DIY investors while the B2B division caters to over 400 financial advisory (FA) companies, financial institutions and banks, which in turn have more than 9,000 wealth advisers. The B2B2C division is new and focus on providing fintech solutions to corporates who want to reach out to consumers without developing the infrastructure.

iFAST makes money from fees charged to the various customer segments they serve.

The B2B & B2C segments are the only 2 segments generating revenue at the moment, with B2B contributing 65% of the net revenue in 1Q2020.

iFAST also reports that 80.9% of its revenue in the period between 2016 and 1Q2020 were recurring revenue which proves that their business is sticky.

iFAST has operations in Singapore, Hong Kong, Malaysia and China. More importantly, business decisions are made on an individual country basis instead of by the 4 main business divisions. Singapore remains the major revenue contributor with 65% in 1Q2020.

Financials

In FY19, iFAST recorded revenues of $125.4m and gross margins of $65.2m. This translates into a high gross profit margin of 52.0%, which was 3.3% higher than the previous year. The expansion in margin was contributed by both revenue increment of 3.4% and costs decline of 2.3%.

FY19 dividend was 3.15 cents which was in line with FY18. 1Q20 dividend was also maintained at 0.75 cents, similar to 1Q19’s.

iFAST has a consistent dividend distribution track record in the last 4 years and has gradually increased its dividend per share too. We expect iFAST to continue this excellent track record as the current payout ratio is below its net profit and the business has continued to grow.

iFAST has an equity base of $89.6m with a net cash position of $24.2m, translating into a NAV of $0.335 per share and a net cash position of $0.09 per share.

iFAST has been able to deliver an ROE of between 7.1% and 18.1% in the past 5 years. In addition, ROE in the past 3 years were above 10%.

Investment Thesis

#1 – Integrated wealth management fintech platform

One of the core visions of iFAST is to increasingly be at the forefront of the industry in empowering its various B2B partners to embrace the opportunities offered by the Fintech revolution, including helping their B2B partners develop their own white labelled B2C offerings. These are platforms developed by iFAST for the client and under the client’s brand.
With this offering to clients, iFAST has always been at the centre of its clients’ network, helping to connect between stock exchanges, banks and other product providers. This will enable iFAST to capture revenue on the whole chain of support that it offers. To this note, iFAST has secured licences in various countries and has built a team with compliance and risk management expertise.

#2 – Value proposition and solutions

Convergence and cross-border Fintech opportunities will be among the drivers of the trend. Convergence refers to the increasing linkages of the different segments of the wealth management industry. Historically, life insurance, unit trust and stockbroking have been seen as different industries. However, the reality is that all three industries are aiming to serve the investment and long-term savings needs of the consumers and integrating them would offer a more holistic service to iFAST’s clients.

#3 – Organic growth

iFAST has set itself a target Assets Under Administration (AUA) of $100 billion by the end of 2028. The key Singapore market has a target of $35 billion. The current AUA is around $9.54 billion as of 31 Mar 2020. iFAST believes that in the medium to long term, there is still a lot of room for growth as the current AUA is still a small amount relative to the size of the wealth management industry in Singapore and Asia.

China is still in its initial stages of building up, and have been recording operating losses since inception. In the years ahead, we expect China to be an important contributor to the Group. While competition in China is intense, iFAST is aware and is attempting to approach the market differently by taking a B2B2C approach as opposed to some of the major competitors who are taking a B2C approach. By taking a B2B2C approach, they are able to secure working relationships with not only consumers but also with corporate institutions. This will enable iFAST to quickly expand revenue where opportunity arises.

#4 – Inorganic growth

iFAST’s method of gaining an initial foothold in another country is via acquisition. We expect this to continue over the next few years as iFAST targets a couple of fast growing countries in Asia.

In addition, we believe that with the new range of products, services and capabilities launched across the various markets, iFAST will continue to focus on gaining scale as a platform, while also ensuring continuing improvements in the service offerings.

#5 – Digital banking

iFAST is leading a consortium that is bidding for one of three Singapore’s digital wholesale bank(DWB) licences. iFAST’s partners are China-based companies Yillion Group and Hande Group. Yillion operates one of the four digital banks in China and has Hong Kong-listed Meituan Dianping – the third-largest Chinese Internet firm based on market capitalisation – as a key shareholder.

Applications for Singapore’s first digital bank licences results are expected to be announced in late 2020. This shows that iFAST is looking at growing not just via its existing platform but also looking at opportunities within its sphere of expertise.

Risk Factors

(i) Execution risks

iFAST is currently focused on growth, it does not report cost base, cost of acquisition, does not split AUA between value growth and new AUA. There is a risk that poor execution may impact quarterly results (which iFAST has voluntarily decided to continue with) and the share price. Integration of acquisitions is also important in realisation of expected growth prospects.

(ii) Macroeconomic headwinds

With the slowing macroeconomic conditions, should the equities market underperform, both AUA and volume will decline as customers may pull out their funds to avoid volatility. It is challenging to focus on growth in such a condition as iFAST will need to continue to incur costs on the platform even when the AUA shrinks.

(iii) Government policies

Regulatory interventions in the form of additional licenses or certain prohibitions will impact iFAST. iFAST is focused on being the market leader in Singapore, Hong Kong and Malaysia. For example, if Hong Kong implements certain policies as a consequence of the current political turmoil, its position as a financial hub may weaken and the shrinkage of the market size will impact iFAST negatively.

(iv) Competition and convergence of industries

Life insurance, unit trust and stockbroking industries are all aiming to serve the investments and long term savings needs of the consumers. These are generally seen as different industries mainly due to separate legal acts that govern them. iFAST believes that the evolution of Fintech capabilities and evolving global regulatory trends will lead to convergence – meaning, the increasing integration of the products and services of the three industries.

This means that there is an opportunity for joint ventures between iFAST and the incumbents of each industries, however there is also a possibility of any company in the three aforementioned industries entering into iFAST’s space and increasing the competition.

Conclusion

We are looking at a medium term target ROE of 10% which is to be underpinned by growth in fees and AUA.

Based on the current share price of $0.92, the current year projected PE ratio is 26 and P/B ratio is 2.8. The PE ratio range has been between 23 to 41, higher than the Singapore average as there is some growth potential being priced in. We also note that the IPO price in 2014 was $0.95.

We think a reasonable price range for iFast in 2025 is $2 to $2.50 based on the following data; the historical range for PE is 5 to 25 with an average of 13, and P/B is 0.8 to 2.8.

Based on a 95% payout ratio on a forward eps of $0.08 and a dividend yield of 4-5%, we are able to also support the projected share price.