Singapore-listed financial services firm iFast Corp has reported record quarterly earnings for 2Q2020, as it collected higher recurring fees from a bigger pool of assets under administration. The company, which is aspiring to be a digital bank, enjoyed a lift from higher trading commissions as well.
For the three months to June 30, 2020, iFast reported net earnings of $4.53 million, up 84.7% y-o-y. Revenue in the same period was $38.6 million, up 25.8% y-o-y. For 1H2020, the company doubled its earnings to $8.16 million, on the back of a 33.2% y-o-y increase in revenue to $77 million. It expects full-year 2020 to show “healthy growth” in net earnings.
“Acceleration of digital adoption in the wealth management industry will continue to be a positive factor underpinning the growth prospects of the group,” said chairman and CEO Lim Chung Chun at a virtual press conference on July 23. “The increase in the pace of digitalisation in the wealth management industry has led to a rise in the group’s business volumes across both the B2C and B2B divisions.”
Incorporated in Singapore in 2000, iFast listed on the Singapore Exchange in December 2014 and has since expanded into Hong Kong, Malaysia, China and India. As at end-March 2020, its online investment product distribution platform offered over 7,000 funds from over 270 fund houses, over 1,300 direct bonds, stocks and exchange traded funds or ETFs (with Singapore, Hong Kong and US stockbroking capabilities), as well as discretionary portfolio management services. Over 400 financial institutions and over 9,000 wealth advisers use iFast’s B2B platforms across the five markets the company operates in. More than 460,000 customer accounts have also been opened across the five markets.
The company’s core business of unit trust distribution, which generates a steady stream of recurring fees, enjoyed healthy growth. Its AUA (assets under administration) increased by $1.25 billion in 1H2020 to hit a new record of $11.15 billion as at June 30, 2020.
Of the company’s AUA in 2Q2020, 67% came from its operations in Singapore, up from 65.5% in 1Q2020, with Hong Kong and Malaysia forming 21.1% and 8.9% respectively. While unit trusts contributed the lion’s share of AUA at 77.6% in the latest quarter, stocks and ETFs rose to 9.5% of AUA, up from 7.4% in the previous quarter and 5.0% in 2Q2019.
Lim says iFast enjoyed “substantial increase” in the trading of stocks and ETFs. In the wake of the market correction that reached its nadir in the second half of March, many retail investors jumped in, hoping to scoop up shares at a lower price.
The surge in trading volume has led to iFast seeing a higher percentage of non-recurring net revenue of 30% in 2Q2020, versus 19% in 2Q2019. Types of non-recurring revenue include transaction fees, forex conversions, fintech solutions, IT development fees and insurance commissions. “The percentage contributed by recurring revenue has gone down in recent years. The split of 70-30 is still a number that we are very comfortable with,” says Lim, referring to the proportion between recurring and non-recurring income.
Despite the growing contribution from non-recurring income, Lim expects that in the coming quarters, the company’s net inflow to its AUA will remain a “key measure” of the company’s performance. “From quarter to quarter, there is some volatility in the market that may affect volume in our stockbroking business. We are hopeful that net inflow will remain strong,” he says.
Cornerstone product
CGS-CIMB analysts agree that iFast will have this steady revenue source to fall back on — even if retail market participation tapers off. “We believe that iFast’s cornerstone product of higher- margin (and recurring) unit trusts will continue to provide a steady stream of recurring revenue when risk-on sentiments abate,” wrote Andrea Choong and Caleb Pang in their July 23 note.
They have raised their FY2020-2022 earnings per share (EPS) estimates of iFast by 9% to 37% to reflect higher transaction volumes and AUA growth. While keeping their “add” call on this stock, they have raised their target price from $1.65 to $1.85.
DBS analyst Ling Lee Keng is way more upbeat on iFast. In her July 24 report, she calls the stock a “buy” and her new target price on the stock is $2.35 — a big jump from $1.27 previously. She describes the 2Q2020 results as “above expectations”, and is betting on the AUA growth momentum to continue at 12% per year for this year and next. “We believe that there is still room for growth as the current AUA level remains low, at about 10% of the some $100 billion in AUM of the authorised and recognised collective investment schemes in Singapore,” writes Ling, who has revised her earnings estimates by 41% and 44% higher for FY2020 and FY2021 respectively.
With significantly improved numbers, iFast shares have been getting popular with investors. Year to date, it has outperformed the Straits Times Index to close at $1.79 on July 29. At this level, the company has a market value of $486.2 million and is trading at 42.6 times historical earnings.
Besides giving shareholders capital gains via its higher share price, the company is set to pay more dividends as well. For FY2018 and FY2019, it paid 3.15 cents per share in total for both years. For FY2020, on top of 0.75 cent already paid for 1Q2020, iFast will give out another 0.75 cent for 2Q2020 — the same level thus far as FY2019. However, DBS’ Ling expects full-year payouts of 5.7 cents for FY2020 and 6.55 cents for FY2021.
Rising expenses
At the end of last year, the company mulled over cutting costs as it was anticipating a slower 2020, says Lim. “But as it turned out, 1Q2020 was strong and we have reason to feel positive about 2H2020, which is why we feel it is okay for us to increase some expenses for the current year, while still ensuring that bottomline numbers will still be strong.” For 2Q2020, its total operating expenses increased 5% q-o-q and 14% y-o-y, as iFast hired more people.
Yet, despite the higher headcount, during 1Q2020 and 2Q2020, the company’s bottomline enjoyed significant lifts of $0.5 million and $1 million from the government under the Job Support Scheme, which subsidises wages of Singaporeans for companies. With the company’s strong performance in 1H2020, management decided to use the opportunity to ramp up hiring. This is partly in view of its “potential success in the digital banking space”, says Lim.
iFast is part of a consortium eyeing one of the three digital wholesale bank licences to be awarded by the Monetary Authority of Singapore (MAS) later this year. “Securing the virtual bank licence would further enhance iFast’s business model. A digital banking licence will allow the group to broaden its services to include the ability to provide cash management and related wealth management services,” says DBS’ Ling. “The lending capabilities would be another additional revenue stream for the group.”
Besides iFast, which holds a 65% stake in the consortium, its two partners, both from China, are Yillion Group and Hande Group. The others are Tencent’s WeBank, Alibaba’s MyBank and Xiaomi’s XWBank.
iFast’s consortium is among the nine DWB applicants that have progressed to the next stage of the licence bid. According to Lim, if it wins one of the licences, iFast is ready to commit $80 million in upfront capital and launch the bank by end of 2021. It plans to raise the capital needed through a combination of issuing new shares, drawing from existing resources, and borrowing from banks.
iFast is guiding for an increase of between 9% and 11% in operating expenses — according to its 65% stake — for FY2022 if it wins the licence, and that the venture will not contribute to the bottom line right away. “We expect it to be EPS-accretive if you’re thinking of the next three to five years. On an immediate basis, year one will be a build-up stage [for digital banking services],” says Lim.
