iFAST Share Price Is Hitting New Highs: Is It Still Worth Investing in the Fintech Company?

Update: iFAST Applies For Digital Bank Licence in Malaysia

iFAST has confirmed that it has applied for a digital bank licence in Malaysia. The company mentioned during its 2020 annual general meeting that it was in the midst of firming up details for the licence.

On 30 June 2021 after market close, iFAST Corporation Ltd (SGX: AIY) announced that it has led a consortium in the submission of an application to the Malaysian central bank for a digital bank licence in the country. 

iFAST will own a 40% stake in the digital bank (called “iFAST Bank”) if the application is successful.

The beneficial equity ownership of the consortium will be around 57% Malaysian.

The Malaysian consortium partners are Koperasi Angkatan Tentera Malaysia Berhad, THZ Alliance Sdn Bhd, and Mr Lee Thiam Wah, founder and major shareholder of 99 Speed Mart Sdn Bhd.

Internationally, the iFAST Bank consortium comprises Yillion Fintech Pte Ltd, a provider of core digital banking technology and capabilities for Yillion Bank, one of the four digital banks in China.

Lim Chung Chun, chairman and chief executive of iFAST, shared how the digital bank can create positive change for the unserved and underserved market segments such as Malaysia’s bottom 40% (B40) population.

He explained:

“We think that the B40 segment has clearly been unserved and left behind even as Malaysia progresses. With the synergistic capabilities within our consortium, the solutions offered for the B40 are ones that will provide immediate benefits and results – such as free life insurance, interest-free loans for daily necessities, and micro investments and insurance. iFAST Bank will serve the B40 segment and be profitable while doing so.”

According to the Malaysian central bank, it may issue up to five digital bank licences to qualified applicants by the first quarter of next year. The digital bank licensee can serve both retail and corporate customers.

[The article below was published on 1 February 2021]

iFAST Corporation Ltd (SGX: AIY) share price has doubled in just one month this year. 

At the time of writing on 1 February, the company’s share price stands at S$6.17, up around 12% so far for the day.

(Side note: iFAST made a material announcement a few days ago, which we will discuss later.)

Investors might be wondering if the home-grown fintech company is still worth investing in even after the huge run-up in its share price. 

Let’s explore more about iFAST right here and if it still looks attractive over the long-term.

TL;DR: Should You Consider iFAST For Your Portfolio? 

Here are some investment merits for iFAST:

• Scalable business
• Lots of recurring revenue
• Long runway for growth

However, investors should also take note of risks such as iFAST’s China business not taking off and an expensive-looking stock valuation. 

iFAST’s Business Background

iFAST runs an Internet-based investment products distribution platform that provides a comprehensive range of investment products and services to both corporate clients and retail investors.

As of 31 December 2020, it had assets under management (AUA) of S$14.5 billion, a record high.

The company has a presence in Singapore, Hong Kong, Malaysia, China and India. 

iFAST runs two main business divisions, namely, Business-to-Consumer (B2C) and Business-to-Business (B2B).

Together, the company offers more than 11,000 investment products including unit trusts, bonds, stocks and exchange-traded funds (ETFs), and services such as online robo-advisory portfolios and financial technology (fintech) solutions to its customers.

The B2B platform is used by financial advisory firms, financial institutions and banks.

Meanwhile, Fundsupermart.com (which includes FSMOne in Singapore) falls under the B2C umbrella.

The following chart shows how iFAST connects the various players in the financial industry:

iFAST’s Competitive Advantage

iFAST’s competitive advantage comes from its network effect, which is similar to that of Visa and Mastercard. 

iFAST’s value proposition for investors goes like this:

As iFAST signs up more suppliers (such as fund houses, banks, and insurance providers), more B2B customers (such as financial institutions) will see value in the platform since there are more products to sell to their own clients. 

With more products (and hopefully more sales for B2B customers), the suppliers would be keen to add even more products, bringing in even more sales when the B2B customers sell more products to their own customers. This creates a flywheel phenomenon. 

A similar theory applies to iFAST’s B2C business too. 

Due to the nature of its business model, iFAST’s business is very scalable. Recurring net revenue-to-AUA has exceeded operating expenses-to-AUA over the years, indicating that iFAST has reached significant scale.

iFAST’s Revenue Streams

Next, we will look at how iFAST makes money.

We will focus on the company’s net revenue here, which represents revenue earned by iFAST after commission and fee are paid to third-party financial advisers.

iFAST makes recurring net revenue through trailer fees, platform fees, and wrap fees. The recurring net revenue is calculated based on a percentage of average AUA of investment products distributed on the firm’s platforms.

The major part of this revenue is from trailer fees, which is the fees that a fund house pays iFAST for carrying its funds on the platform. 

iFAST has also added two new recurring net revenue streams, namely:

1. Net interest income
2. Fintech solutions IT maintenance fees

Its non-recurring net revenue includes transaction fees paid by customers to invest in unit trusts, stocks, and ETFs, fintech solutions IT development fees, forex conversions, and insurance commissions. 

Below is a summary of the flow of fees for iFAST:

iFAST’s recurring net revenue is largely correlated to its AUA.

Therefore, iFAST’s AUA, which shows the total net value of investment products that are under the company’s custody, is a key figure for investors to track for the company.

In general, the higher the AUA, the higher is iFAST’s net revenue.

The following shows how iFAST’s AUA has grown in the past:

With the increase in AUA over time, iFAST’s recurring net revenue (shown in the dark blue bar below) has also improved over the years.

iFAST’s Financial Highlights

The following shows how iFAST’s net revenue, net profit, and operating cash flow (excluding China, which is still loss-making and is at its infant stages) have grown in the past couple of years (the company has a 31 December year-end): 

From FY2016 to FY2019, net revenue and net profit jumped 17% each annually, which is commendable.  

For the third quarter of 2020, iFAST’s net profit hit a record high of S$6.2 million, surging 151% year-on-year. 

As of 30 September 2020, iFAST continued to have a strong balance sheet with S$30.3 million in cash and a total bank loan of just S$2.4 million. 

The fintech company, with its return on equity (ROE) of around 19% and strong balance sheet, fits the bill to tide through any tough economic conditions.

iFAST also continues to generate copious amounts of free cash flow. For the first nine months of 2020, free cash flow stood at S$21.7 million, up more than 200% from S$6.6 million a year ago.

iFAST will announce its 2020 earnings on 5 February after the stock market closes.

iFAST’s Dividend History

With strong free cash flow generation, iFAST is able to dish out growing dividends over the years. 

iFAST’s dividend per share has increased by 4% per year, from 2.79 Singapore cents in FY2016 to 3.15 Singapore cents in FY2019. 

For the third quarter of 2020, iFAST paid out 0.80 Singapore cent per share in dividend, an improvement from the 0.75 cent dividend given out exactly a year back. 

The company said that the increase takes into account the “balance between rewarding shareholders and retaining sufficient capital in the event of a need for expansion such as the launch of the digital bank business in Singapore if the application is successful”.

iFAST’s Insider Ownership

As of 13 March 2020, iFAST’s co-founder, chairman and chief executive officer, Lim Chung Chun, had a 22.3% interest in the company, either directly or indirectly.

The high insider ownership suggests that the company’s top leader has plenty of skin in the game, and his interests would be aligned with those of iFAST’s minority shareholders.

iFAST’s Growth Prospects

iFAST is well-positioned to tap into the growth opportunities in Asia’s wealth management segment over the long-term. 

Overall, the company has a target of reaching AUA of S$100 billion by the end of 2028. For perspective, as seen earlier, the company’s AUA was S$14.5 billion as of end-2020. 

iFAST’s continuous focus on building a scalable digital wealth management platform is slowly bearing fruit, especially amid the COVID-19 pandemic. The latest AUA grew 44.5% year-on-year and 14.8% quarter-on-quarter. 

The company’s China business is currently loss-making, but iFAST sees huge potential in the country.

Lim said the following about China in iFAST’s 2017 annual report:

“Some shareholders have been concerned about the operating losses that we are currently incurring for China. The reality is that the nature of the investment platform business is such that losses are expected in the first few years of the set up before a critical mass is achieved. We see this initial phase as an important investment for the long run. China is expected to be the biggest wealth management market in Asia, and it is a market that we should not ignore.”

China has plans to open up its US$45 trillion financial industry, and that could give iFAST plenty of opportunities in the country.

Disappointingly, iFAST wasn’t selected to be one of the digital wholesale banks (DWBs) here. But the Monetary Authority of Singapore (MAS) mentioned that it will review whether to grant more DWB licences in the future. 

iFAST said that it “remains committed in continuing its pursuit of a digital bank licence, including in other jurisdictions”. 

On 30 January 2021, iFAST announced that PCCW was awarded the contract to design, build and operate Hong Kong’s eMPF platform. The MPF (Mandatory Provident Fund) is the city’s pension system.

iFAST will be the prime subcontractor for PCCW. iFAST added that its participation in the eMPF platform project is subject to the finalisation of contractual details.

According to a DBS analyst report released prior to the announcement, the win could contribute to over S$10 million in earnings over the medium term. That’s substantial, given iFAST made around S$14 million in 2019. 

iFAST is expanding its suite of products.

The company is expected to allow trading of Malaysia-listed securities by early next year, on top of the Singapore, United States and Hong Kong stock markets. 

iFAST plans to expand to China via the Shenzhen/Shanghai-Hong Kong Stock Connect as well. 

The Stock Connect allows international and mainland Chinese investors trade securities in each other’s markets through the trading and clearing facilities of their home exchanges.

It looks like there’s plenty of opportunities for iFAST to capitalise on as it works towards its S$100 billion AUA target.

Main Risks With iFAST

All businesses have risks, and iFAST is no exception.

One of the risks with iFAST is its China business not taking off.

Even though the opportunity is enormous in the Middle Kingdom, the opening up of the country’s financial industry might attract many competitors.

There’s an opportunity cost involved if iFAST’s China business does not turn profitable over the long-term.

Another risk with iFAST is that around 80% of its AUA is parked under unit trusts. The company receives recurring trailer fees from fund houses to distribute their unit trusts through its platform. 

There has been increasing scrutiny surrounding trailer fees charged by distributors like iFAST. 

If Singapore were to go the way of Britain and Australia, where trailer fees have already been banned, iFAST’s business could be severely impacted. 

iFAST’s Valuation

At iFAST’s share price of S$6.16, it has a trailing price-to-earnings (P/E) ratio of around 97x and a dividend yield of 0.5%. 

Excluding the loss-making China business, iFAST’s trailing P/E ratio falls to about 75x, which still looks expensive.  

However, with iFAST scaling to new AUA heights and having lots of growth opportunities ahead, the company could still make a great investment over the long run.

Having said that, iFAST seems to be priced for perfection right now.

Investors should be mindful that iFAST’s share price could collapse if growth slows down for any reason.

What Are Your Thoughts iFAST?

Come and discuss your thoughts on iFAST Corporation Ltd (SGX: AIY) in our community at Seedly!

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer owns shares in iFAST. 

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