As shares in iFast continue their decline, DBS Group Research analyst Ling Lee Keng has downgraded her recommendation to “hold” with a lower target price of $5.42 from $8.75 previously.
Ling’s report on April 26 is a reversal from her optimistic view just a day before.
“Post the 1QFY2022 results briefing, the group reiterated its four-year plan but near-term catalysts are lacking,” she writes.
In addition, the bidding for the digital bank license in Malaysia is likely to be off with management stating that “it is fair to assume that [the bidding] was not successful”.
In the near term, iFast has guided for moderate growth in its net revenue in 2022 with a decline in profitability.
The company reported higher-than-expected operating costs due to the various initiatives in the 1QFY2022 including the UK bank acquisition and the ePension project, all of which led to a lower net margin of 14%. The 1QFY2022 ended on March 31.
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“This trend is likely to stay as these initiatives are part of the overall planning. As such, we have further trimmed our pre-tax margin assumption to 12.1%/13.1%, from our recently revised margin of 13.8%/14% for FY2022/FY2023, vs 16.6% in FY2021,” says Ling.
With this in mind, Ling has lowered her earnings estimates for iFast by another 12% and 6% for the FY2022 and FY2023 respectively. Her lowered target price is to account for the cut in earnings, higher weighted average cost of capital (WACC) on the back of the rising interest rate environment, and slower growth.
In spite of its 30% drop in share price year-to-date, iFast is still trading at a relatively high valuation with a P/E of 63.8x and 42.9x for the FY2022 and FY2023 respectively.
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“Its current P/E valuation is still above the four-year average PE of 40x and higher than global peers like Charles Schwab and Hargreaves, which trade at an average forward P/E of 18.7x for FY2022 and 15.9x for FY2023,” the analyst writes.
“The high valuation is partly due to the current scale of the business, which is not at an optimal level yet. We expect valuation to improve as various initiatives start to bear fruit,” she adds.
However, the analyst is remaining upbeat on iFast’s longer-term prospects, as she sees strong growth momentum in the company’s earnings from 2023, propelled by its business in Hong Kong.
“The group expects a robust ramp up in profitability between 2023 to 2025 as maiden contributions from its new ePension division in Hong Kong come onstream. Longer term plans are still intact,” she writes. “These include growing its assets under management (AUA) to $100 billion by 2028; to accelerate Hong Kong growth, propelled by the ePension project; add digital banking and other capabilities; and building a global business model.”
Further to his report on April 25, Citi Research analyst Tan Yong Hong has lowered his target price on iFast to $4.20 from $5.20 previously.
The company’s core business is valued at $3.10 per share, and its Hong Kong eMPF platform is valued at $1.10, writes Tan.
Keeping his “sell” call, Tan notes the decline in iFast shares, which fell some 6% after its 1QFY2022 earnings were released.
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Following a briefing conducted by iFast’s management, Tan has lowered his earnings per share (EPS) estimates by 17%, 23% and 20% for the FY2022, FY2023 and FY2024 respectively.
Labelling the counter as “high risk”, Tan notes that the current bear market is negative for iFast’s earnings.
“[Our] earnings downgrade is driven by lower revenue expectations (soft AUA growth rate and weak net platform margins). Management. guides lower absolute profitability for FY2022 on weak markets conditions and BFC Bank acquisition ($4 million attributable loss),” he writes.
In addition, Tan has lowered his AUA growth estimates for the FY2022 and FY2023 by 11% and 15% respectively. The lower estimates implies a y-o-y growth of 8% and 15% y-o-y respectively.
He has also lowered his net platform margin estimates to factor in the weak sentiments that will impact net platform margins due to lower trading volumes and higher stocks and exchange-traded funds.
An increase in net platform margins by five basis points will raise Tan’s target price by 30 cents; an increase of 5% in his AUA estimates for the FY2022 will lift his target price by 10 cents.
CGS-CIMB Research analyst Andrea Choong has lowered her target price on iFast to $7.60 from $9.70 previously.
She has also cut her earnings estimates for the FY2022 to FY2023 by 19% to 35%. The lowered earnings were to factor in the sustained market volatility and expedited ePension contributions from FY2023 onwards, she says.
She adds that she has cut her distribution per share (DPS) estimates to 4.8 cents from 5.2 cents previously.
Choong has, however, kept her "add" call as she remains upbeat on iFast's earnings uplift from FY2023.
Meanwhile, iFast's earnings for the 1QFY2022 missed the analyst's estimates due to softer-than-expected revenue growth on the back of poor market conditions. As such, PATMI for the 1QFY2022 formed only 18% of her full-year estimates and at 16% of the street's estimates.
"In line with management’s FY2022 guidance for moderate net revenue growth while cautioning for a decline in profitability, we believe that challenging market conditions and rising interest rates could keep investors on the sidelines as asset valuations stay suppressed," says Chong.
She adds: "We cut [our] FY2022 AUA growth assumptions to 11% to 15% y-o-y in FY2022-FY2024 (from 16% to 22% previously), leading to softer net revenue growth during these periods. Start-up losses of $4 million/$2 million in FY2022/FY2023 and elevated opex (for underlying business, ePension and digital iFast Global Bank) will likely weigh on near-term earnings as well."
As at 1.36pm, shares in iFast are trading 31 cents lower or 5.84% down at $5.
