iFast Corporation - DBS Research 2018-10-29: Growth Amidst Volatility

IFAST CORPORATION LTD. (SGX:AIY)

iFast Corporation - Growth Amidst Volatility

iFAST's 3Q18 results in line; 9M18 net profit rose 40% y-o-y.
AUA increased 18.7% y-o-y to S$8.5bn, achieving ninth consecutive quarter of record AUA levels.
Raised AUA growth assumption to 12% for FY18F; maintained 5% for FY19F and FY20F.
Maintain BUY with a higher Target Price of S$1.33.

iFAST has made significant progress in the last 2-3 years by broadening the range of investment products and services on its platforms, and laying the infrastructure to kick-start its business in China, a market it believes will be key in the future. The group is now a more integrated wealth management platform, with five key product groups – unit trusts, ETFs, bonds, stocks and insurance.
iFAST is also pursuing a virtual banking licence in Hong Kong. This would strengthen its position as a key wealth management Fintech player.

We have raised the AUA growth assumption to 12% y-o-y, up from 8% previously, to account for the strong growth YTD. Growth rate for FY19F and FY20F is maintained at 5%.
We believe that there is still room for growth as the current AUA level remains small relative to the size of the wealth management industry in Singapore and the other Asian markets it operates in.

3Q18 net profit rose 297% y-o-y to S$2.5m but eased 119% q-o-q. Revenue gained 0% y-o-y but was flat q-o-q.
AUA increased 187% y-o-y to S$85bn, achieving the consecutive quarter of AUA levels, despite the volatile market.

The securities and financial services industry is highly regulated and iFAST is subject to a variety of laws and regulations across the regions it operates in. iFAST’s operations are also vulnerable to market sentiment.

In 3Q18, iFAST’s net revenue increased 188% y-o-y to S$1m (+3.4% q-o-q) and net profit rose 297% y-o-y to S$5m (-11.9% q-o-q), accounting for 5% of our FY18F numbers. A 75-Sct DPS was declared, similar to 3Q17.
For the 9-month period, net revenue increased 240% y-o-y to S$448m and net profit rose 40.4% y-o-y to S$1m. Both the revenue and net profit account for 9% of our forecasts.
Excluding China, the group’s net profit was S$118m in 9M2018, a y-o-y increase of 316%.

Despite volatile market conditions in the first nine months of 2018, iFAST’s AUA increased 18.7% y-o-y to hit a record high of S$8.5bn as at 30 September 2018, the ninth consecutive quarter of record-high AUA levels, bolstered by the growth in the group’s business in both the B2C and B2B divisions in the period. This is mainly attributable to the improvements and progress that iFAST has made in enhancing its overall capabilities as a Wealth Management Fintech Platform over the past few years.
iFAST is benefitting from the group’s continuing efforts in widening the range of investment products and services and strengthening the financial technology capabilities of its platforms in the various markets in recent years.

Key markets Singapore and Hong Kong did well, mainly due to increases in investment trading volumes in exchange traded funds (“ETFs”) and stocks and subscription of investment in unit trusts (“UTs”). The rise in yields in the market in recent quarters has also led to an increase in clients’ investment subscription in bonds.
In China, the combined effects of weak performance in the equity market due to escalating tensions over trade wars between the US and China and some failures in peer-to-peer lending platforms resulted in poor market sentiment in recent quarters. The losses of iFAST's China operations for 2018 are expected to be slightly higher than 2017. In 3Q18, its China operations incurred a higher loss of S$1.28m, vs S$1.02m in 3Q17 and S$1.05m in 2Q18. For 9M18, China incurred a S$3.48m loss, vs S$3.04m in 9M17.
Poor market sentiment in Malaysia also led to a slower growth for the unit trust business but this was partially offset by the strong interest in the bonds and discretionary portfolio management service.

iFAST has taken steps to work towards a structure whereby in the medium-to-long term (3-5 years), its Hong Kong and China businesses could be organised as a separate standalone listed subsidiary. The group believes that having a separate listing for the China and Hong Kong business would benefit its shareholders as the market is currently not appreciative of the China business as it is still incurring losses.
A successful listing could strengthen the group's overall capital base, and to provide funding for future growth. China is still in the growth phase, and iFAST would need more capital if its application for a virtual banking licence is approved.
iFAST has already applied for a Virtual Banking licence in Hong Kong. If successful, this will further improve the group's ability to continue growing as a leading wealth management Fintech platform in Asia. A Virtual Banking licence will enable the group to provide some basic banking services such as deposit taking and lending, which can potentially enhance the capability of a wealth management platform substantially.

Maintain BUY with a higher Target Price of S$1.33.
We have raised the AUA growth assumption to 12% y-o-y to S$8.5bn, up from 8% previously, to account for the strong growth YTD.
The growth rate for FY19F and FY20F is maintained at 5%. As such, our earnings forecast was raised by 4%. This leads to a higher Target Price of S$1.33 (previously S$1.26).
Our Target Price is based on Dividend Discount Model (DDM) valuation methodology, given that it is a cash-led business, supplemented by a relatively high dividend payout ratio of about 60%.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2018-10-29

SGX Stock Analyst Report BUY MAINTAIN BUY 1.33 UP 1.260