iFAST Corporation Ltd - Phillip Securities Research 2016-07-15: Riding The Wave Of Financial Revolution

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IFAST CORPORATION LTD AIY.SI 

iFAST Corporation Ltd - Riding The Wave Of Financial Revolution

• Focused on Asia Pacific ex Japan, the region with the 2nd fastest growing private financial wealth.
• Regulatory changes and industry developments are favourable for platform sales channels.
• Initiate with “Buy” rating and SGD1.275 TP, implying a 30.22% upside.

Why did we initiate?

1. Missing the big picture. 

• iFAST share price has been hit by overall downbeat sentiment. But we see that the market may be missing out the big picture that digitization of finance industry is gathering pace. We also believe that digitization will benefit investment platforms greatly because of its similarity with the ecommerce model. 
• Amazon and Alibaba aggregate demand and connects them with sellers and earn fees by commanding a clout in the ecosystem. In the same vein, iFAST is a distributor that aggregates demand for investment products and connects them to product providers.

2. Scalability. 

• Similar to the ecommerce model, iFAST is able to grow AUA fast and increase net revenue earned. We believe that iFAST is still in the early stages of that growth curve because of the fortuitous industry developments that we describe in our Investment Thesis.

3. First mover advantage in Asia Pacific. 

• There are only a handful of direct competitors in Singapore – Aviva Ltd’s Navigator, Dollardex, Phillip Securities’ POEMS and FAME platform. 
• We believe this is important because first mover is a characteristic shared by the likes of Amazon and Alibaba. 
• First movers would have the resources ready to capture the new markets brought upon by seismic shifts in consumption pattern, we believe that iFAST is ready when investing patterns change in the world of finance. 
• We also believe that iFAST will be particularly attractive to institutional investors who opine a changing investment landscape.

Investment Actions

• We initiate coverage on iFAST with a “Buy” rating and a target price of S$1.275 based on 25x PER on estimated 5.1 cents FY17F EPS. 
• We used FY17F EPS because FY16F earnings do not reflect the potential growth from China and India operations. This implies an upside of 30.22% (including dividends) from its last closing price.

Investment Merits

1. Leading and established funds and investments distribution platform in Singapore, Malaysia and Hong Kong

   1. One-stop multi-service platform with regional reach
      iFAST has a comprehensive suite of services, including distribution of investment products, investment administration, execution of transactions, research and investment trainings, software tools, IT services, and backroom functions to FAs and financial institutions in Singapore, Malaysia and Hong Kong. At the same time, iFAST maintains a business relationship with a large number of product providers that allows iFAST to distribute over 1,800 investment products. Given this scale, iFAST has the capacity to capture new opportunities from both supply and demand sides of the industry.
   2. Broad range of products
      Besides distributing unit trusts, iFAST has included ETFs, bonds and stocks into its staple. In August 2015, iFAST launched the Online Discretionary Portfolio Management Service (Online DPMS) in Hong Kong. And in May 2015, iFAST launched Bondsupermart to provide research and information on bonds. In July 2016, an online bonds transaction platform Bonds@FSM was launched. Investors will be able to request for the latest corporate bond prices via the online chat RFQ (Request for Quote) module. This facilitates trade execution for over 100 corporate bonds currently available on the Bonds@FSM platform. Bond trading has often been exclusive to institutional and high net worth investors and transacted Over-The-Counter which means prices are less transparent. By aggregating demand from a fragmented retail market through the Bonds@FSM platform, iFAST has the first mover advantage improve bond price transparency and create a niche within the bonds market.

2. Scalable business model

   • Scalable nature due to its:
     1. Internet-based model allows it to engage a wide range of FAs and financial institutions.
     2. Ability to focus on its core abilities: IT, operations and settlement, client services and research functions enhances its ability to integrate and allows it play an entrenched role in the value chain.
     3. Well-established infrastructures and its regional presence in Singapore, Malaysia, China, Hong Kong and India, provide iFAST and the capacity to scale faster than its competitors or other fintech start-ups.
   • iFAST’s model also allows it expand into other geographical markets at a cost competitive basis – by incurring minimal, if not without costs, for additional licensing and payment of service fees to third parties.
   • With initiatives like the ARFP, iFAST, with the track record and resources, can move quickly into passport members and add value to industry stakeholders. iFAST can readily provide administration, settlement, operational, transactional and marketing services to channel products across borders. iFAST is therefore more likely to differentiate itself from other fledgling investment platform.

3. Strong IT capabilities and proprietary technology

   • iFAST has strong IT capabilities to achieve the critical platform functions, such as time to market and market reach. iFAST has been recognised for its accomplishments in this area of competency.
   • iFAST provides an efficient calculation and settlement of upfront commissions, recurring wrap fees and trailer fees for B2B customers who are FAs. The FAs can focus on its core business by leaving the execution and settlement of transactions, and collection and processing of fees, to iFAST. As we expect platforms to apply more data analytics to match supply and demand, technological progress in areas of robo advisory is felicitous to iFAST’s business model.

4. Strong financials and clean balance sheet

   • In FY15, net revenue grew at 13.2%, CAGR from FY12 to FY15 is 16.5%. Net profit CAGR for the same period is 47.9%. However, 1Q16 results were negatively affected by the stark sell-off in the global financial markets at the beginning of 2016. 1Q16 net profit (including China) declined 58.4% yoy while 1Q16 net revenue fell 5.1% yoy. We believe this weakness should not derail iFAST growth trajectory. Amidst the pervasive risk-off mood, Bonds@FSM would be able to ride on the increased demand for less volatile bond investments.
   • Net profit margin has been growing steadily on the back of growing net revenue because of the introduction of the platform fee structure in 2010. We are optimistic that as iFAST continues to improve its user interface and establish itself as the Go-To- Market for niche products like bonds, investors will eventually acquiesce to the introduction of the platform fee arrangement. But we believe that margins would compress slightly in near term because we expect more expenses incurred to grow the Chinese market.
   • As at 1Q16, the Group has zero debt and a net cash of S$14.3mn. Its total liabilities stood at S$12.9mn, comprises payables (S$11.9mn) tax liabilities (S$1mn).

Investment Risks

1. Recurring revenue may be affected by reduction of trailer fees, platform fees and wrap fees. The recurring revenue is calculated based on a percentage of average AUA of Investment Products supplied by Suppliers which in turn depends on iFAST’s relationship with the relevant Supplier and the support and services iFAST can provide to the Supplier. New regulations could also change the Fee structures.
2. Reliance on a limited number of service providers for business operations in Singapore. This include 
   1. a data centre to support information system needs, and 
   2. a mailing and logistics service provider to support the dissemination of transaction and fund information.
3. Competition. iFAST face increased competition from other players in the securities and financial services. In particular, banks are investing into digital infrastructure with the intention to compete heads on with internet based investment platforms. Competition will also come from existing and new investment platforms.
4. International market dynamics. iFAST identifies strong growth areas in China and India. But unfavourable economic, political and social conditions could derail progress.
5. Other risks: execution risks; change of regulations, cybersecurity, licensing requirements and brand reputation.

Jeremy Teong CFTe Phillip Securities | http://www.poems.com.sg/ 2016-07-15

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