iFAST Corporation - UOB Kay Hian 2022-01-13: Acquisition Of UK-Based BFC Bank To Dampen Near-Term Earnings

IFAST CORPORATION LTD. (SGX:AIY)

iFAST Corporation - Acquisition Of UK-Based BFC Bank To Dampen Near-Term Earnings

iFAST (SGX:AIY) has proposed acquiring UK-based BFC Bank for a total investment amount of S$73.4m.
We see the move as being in line with iFAST moving towards its 2028 S$100b AUA target, and able to provide tangible progress towards its vision of becoming a top fintech wealth management solutions provider with a truly global business model. AUA growth momentum is expected to continue in 4Q21 and into 2022.

iFAST has proposed to acquire an 85% stake in UK-based BFC Bank (BFC) for a total investment amount of £40m (S$73.4m). The amount consists the acquisition price of £22.6m (S$41.5m), a capital injection of £15m (S$27.5m) and transaction costs of £2.4m (S$4.4m). The remaining 15% stake will be held by the BFC's CEO, Mandeep Ahluwalia.
BFC is a full licensed bank in the UK. In 9M21, BFC recorded a net loss of £2.2m (S$4m) and has a NAV of £17.8m (S$32.7m), implying a deal valuation of 1.5x.

Management believes adding BFC is one of the central components to the iFAST ecosystem. As assets under administration (AUA) for iFAST grow due to the addition of new financial products and new licences in jurisdictions, etc, cash in AUA will inevitably rise in tandem. This is where the two key aspects for any bank - deposits and lending, will be tapped. During the initial stages, BFC will be able to attract deposits from the iFAST ecosystem, which has close to S$1b cash in AUA, 650,000 customer accounts, 540 companies and a network of more than 11,000 wealth advisors. Such deposits can be deployed in a capital efficient manner, earning fee income for BFC without burdening their balance sheet. Eventually as BFC aggregates more deposits, this will provide greater bargaining power in negotiating interest rates for deposits, both within the country and internationally, thereby passing on better rates to their customers.
Over the longer term, BFC could provide leverage and product financing for iFAST’s customers, which will in turn improve interest income for the ecosystem. Taking a cue from Charles Schwab (SCHW US), which also has a banking licence, net interest revenue for SCHW accounted for 52% of the business in 2020 (2019: 61%, 1H21: 42%). This compares to iFAST which does not even provide the breakdown of net interest income its insignificance.

Shortly after announcing the BFC acquisition, iFAST successfully translates to an annual loss of S$6m for 2022-23 and S$3m loss in 2024. Based on the 85% stake, this constitutes 13.9-17.9% of our 2022-24 net profit estimates for iFAST.

Growth in iFAST's AUA has remained robust, reaching S$18.38b as at 30 Sep 21 (+46.1% y-o-y, +4.8% q-o-q). The Singapore market remains as the main AUA growth driver, constituting S$13.0b in AUA (+53.5% y-o-y; +6.8% q-o-q). This is supported by the higher client base across both the business-to-business (B2B) and business-to-consumer (B2C) divisions, where the former saw:
1. resilient business from wealth advisors and institutional partners throughout this pandemic, and
2. new business partners added, while the latter’s FSMOne.com platform continued to attract more AUA with the launch of new products and low commission rates.
Going forward, we expect the strong momentum to sustain, supported by the continued strength in net inflows of S$2.99b in 9M21 (2020: S$3.16b; 1H21: S$2.12b).

We have tweaked our rate environment. We note of 54.6-67.2x may appear elevated, but we believe will be supported by the high earnings growth phase that iFAST is undergoing.
See
Catalysts:
- Stronger-than-expected AUA growth.
- Award of Malaysia digital banking licence in 1Q22.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-01-13

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