4Q21: Continued AUA Growth Led To Operating Scalability
AUA continued to scale up to a record S$19.0b (31.5% yoy, +3.4% qoq), helping iFAST achieve greater operating scale. Net inflows of client assets remained healthy. The group remains committed to its AUA target of S$100b by 2028, implying a CAGR of 27% over the next six years. We have incorporated changes to our model following the BFC Bank acquisition and HK eMPF guidance from management. Maintain BUY with higher target price of S$9.84 (from S$9.75).
RESULTS
• 4Q21 results underperform; dividend raised. 4Q21 net revenue and PATMI rose to S$28.2m (+16% yoy) and S$7.2m (+5.5% yoy), which brought 2021 net revenue to S$113.2m (+31.9%) and net profit to S$30.6m (+44.8%). This was slightly below our expectations as contribution from recurring net revenue of 69.9% was lower than our estimated 73.5% (2020: 70.3%), as negative market sentiment dampened transaction volumes. iFAST Corporation (iFAST) proposed a higher fourth and final DPS of S$0.014 (+40% yoy), which brought full-year DPS to S$0.048 (2020: S$0.033), representing a 43.2% payout ratio.
• Positive operational leverage still at play. While there has been a steady downward trend in PATMI margins over the four quarters of 2021 from 15.9% in 1Q to 13.2% in 4Q, we note that it is primarily due to market effects (trading frequency higher amid improved market sentiment), rather than any competitive element leading to margin pressure. Nevertheless, we are not concerned at this stage as full-year PATMI margin in 2021 was 1.7ppt higher at 14.2% compared with 2020, and this was led by the continued rise in AUA to record levels, leading to improved operational leverage.
• Singapore remains the core market, unit trusts driving growth. Assets under administration (AUA) scaled higher to a record S$19.0b (+31.5% yoy, +3.4% qoq). The apparent sequential growth slowdown in 4Q21 of +3% (3Q21: +4.8%, 2Q21: +8.9%) is largely due to negative market effects. The Singapore market remains as the main AUA growth driver, constituting S$13.58b in AUA (+35.8% yoy; +4.4% qoq). In terms of products, the AUA of unit trusts grew to a record S$13.89b (+27.5% yoy; +3.2% qoq), accounting for
73.1% of overall AUA.
STOCK IMPACT
• Record net inflows of client assets to provide continued growth in AUA. AUA growth is expected to remain stable, supported by the continued strength in net inflows of S$0.76b in 4Q21. This brought 2021 net inflows to S$3.75b, 19% higher than 2020 (1H21: S$2.12b).
• Recent acquisition of UK-based BFC Bank to dampen near-term earnings. iFAST expects start-up losses at BFC Bank (BFC) to continue in the first couple of years before synergies can be reaped from the acquisition. We have assumed that BFC will continue its burn rate and incur additional overheads of S$1.5m/year in 2022-23, before achieving breakeven in 2025. This translates to our estimated annual loss of S$6m (vs S$4m loss management guidance) for 2022-23 and tapering towards a S$3m loss in 2024 (vs
management guidance for breakeven). Based on the 85% stake, this constitutes 15-16% of our 2022-23 net profit estimates.
• Hong Kong eMPF project starting to contribute to bottom line. While iFAST did not provide any breakdown on contract fees derived from the eMPF project, we have penned in a net revenue contribution of S$4m for 2022, before a larger contribution of S$6m and S$27.6m in 2023 and 2024 respectively. Our 2024 net revenue estimate from the eMPF project is deemed conservative, being 20% of management guidance. For the overall Hong Kong market, management is guiding 2024 and 2025 gross revenue of >HK$1b and HK$1.5b respectively, vs 2021’s HK$285m; 2024 and 2025 net revenue of >HK$800m and HK$1.2b respectively, vs 2021’s HK$142m; and 2024 and 2025 profit before tax (PBT) margin of >15% and >33% respectively, compared with 2021’s 34.4%. The guidance from management has conservatively factored a six-month delay on project implementation from May 23 to Nov 23. Investors should note that the eMPF project will not add to overall AUA, but will grow service fee.
• Further potential catalyst in 1Q22. Award of the five new digital banking licences in Malaysia is slated to be finalised in 1Q22. iFAST is leading a consortium which has submitted its bid for the licence. iFAST will own a 40% stake in the partnership, with the remaining equity held by Malaysian partners Koperasi Angkatan Tentera Malaysia, THZ Alliance and Mr Lee Thiam Wah, as well as international partner Yillion Fintech. While earnings impact, if awarded, would not be significant in the near term, our view is that the
award would spur iFAST towards its 2028 S$100b AUA target through expanding its breadth of product offerings. Over the longer term, a digital banking license will lift interest income for the iFAST ecosystem.
EARNINGS REVISION/RISK
• Our revenue estimates for 2022-24 have changed -3.6%, +6.1% and +64% to S$137.2m, S$150.9m and S$231.8m respectively, after accounting for the changes as mentioned above.
• Accordingly, net profit estimates for 2022-24 have been lifted 10%, 21% and 125% to S$36.8m, S$40.6m and S$75.3m respectively,
VALUATION/RECOMMENDATION
• Maintain BUY with a slightly higher DCF-based target price of S$9.84 (from S$9.75), after tweaking our model on changes mentioned above. Assumptions for our DCF model remain unchanged with WACC assumption of 7.0% and terminal growth rate of 2.8%. We believe share price could remain depressed in the near term given the elevated 2022-23 implied PE valuation of 92.3x and 76.8x. However, we remain sanguine post-2024 when valuations narrow to 37.6x, supported by a three-year earnings CAGR of 24.5% for 2024-27.
SHARE PRICE CATALYST
• Stronger-than-expected AUA growth.
• Award of Malaysian digital banking licence.