iFast Corporation - DBS Research 2019-04-30: A Weak Start To The Year

IFAST CORPORATION LTD. (SGX:AIY)

iFast Corporation - A Weak Start To The Year

iFAST's 1Q19 results below expectations, hit by drop in commission for unit trusts and higher costs.
AUA resumes uptrend after temporary pause in 4Q18, +8.7% q-o-q to a record high of S$8.75bn.
Maintain AUA growth but factor in higher costs.
Retain HOLD call; Target Price lowered to S$1.05 on the back of the cut in earnings.

Near term, market volatility will continue to affect IFAST CORPORATION LTD. (SGX:AIY), while its China operation is still expected to be loss-making. Longer term, 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.
iFAST is now a more integrated wealth management platform, with five key product groups – unit trusts, ETFs, bonds, stocks and insurance, and presence in five markets – Singapore, Hong Kong, Malaysia, China and India.

We maintain our AUA growth assumption of 5% p.a. for FY19F and FY20F. We believe that there is still room for growth as the current AUA level remains small, at about 1% the size of the asset management industry in Singapore.

iFAST's 1Q19 results below expectations, hit by drop in commission for unit trusts and higher costs. AUA, however, managed to register a record high of S$8.75bn, up 8.7% q-o-q.

We have cut our earnings forecast by 26-28% after factoring in higher costs. Maintain HOLD call with a lower Target Price of S$1.05, still based on the Dividend Discount Model (DDM) valuation methodology, given that it is a cash-led business.

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.

iFAST reported net revenue of S$27.2m (-12% y-o-y, -3% q-o-q). The decrease in revenue was mainly due to a decrease in front-end commission income for unit trusts. This was partly offset by an increase in transaction fee from newer products including bonds, exchange-traded funds (ETFs) and stocks.
Total operating costs increased by 14% y-o-y, mainly due to higher staff cost (annual salary adjustment and increase in headcount) and higher depreciation charges (additional assets and adoption of new accounting rules). Hence, net profit for 1Q19 plunged 43% y-o-y and 40% q-o-q to S$1.5m.
iFAST's China operation is still loss-making, registering a net loss of S$1.13m, similar to the previous few quarters. A first interim DPS of 0.75 Scts has been declared.
Overall, revenue and net profit account for 23% and 16% of our FY19F forecasts respectively; below expectations.

iFAST’s AUA started at a relatively low level of S$8.05bn at the beginning of 2019. With improved market conditions, the group’s AUA grew 8.7% q-o-q to a record high of S$8.75bn as at end-1Q19.

AUA for Singapore/Hong Kong/Malaysia grew 8.0%/10.2%/10.6% on a q-o-q basis as at end-1Q19. With the launch of the Shariah Discretionary Managed Portfolio in March 2019 and the retail bonds platform for both B2C and B2B clients in April 2019, we can expect stronger growth for Malaysia going forward.
Singapore is still the key contributor to AUA, accounting for 66.6% of the total AUA, followed by Hong Kong with 23.2% contribution and Malaysia, 7.9%. In terms of products, 84.4% are unit trusts, while the other products – stocks, ETFs, bonds, accounted for < 10% each.

With this licence, iFAST China will be able to issue Private Funds with discretionary mandate for accredited investors. Subject to the approval of the Private Fund Management licence application, iFAST China is working to incorporate a Private Fund Management company in Shanghai and eventually launch its own Private Fund, which will focus on onshore investments in the secondary market.

We maintain our AUA growth assumption of 5% growth for FY19F and FY20F but factor in higher operating costs going forward. This leads to a 26-28% cut in earnings for FY19F and FY20F.
Near term, market volatility will continue to affect iFAST, while its China operation is still expected to be loss-making. Longer term, iFAST is expected to benefit from the broadening of products and services on its platforms.
Since our downgrade of call in February after the release of iFAST’s 4Q18 results (see report: iFast Corporation - DBS Group 2019-02-20: Limited Upside), iFAST's share price has been relatively flat. We maintain our HOLD call but Target Price is lowered to S$1.05 on the back of the cut in earnings.
Our Target Price is based on the Dividend Discount Model (DDM) valuation methodology, given that it is a cash-led business with a dividend payout ratio of 60% (excluding China operation).

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-04-30

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.05 DOWN 1.190