Growth stocks are companies that grow at rates above that of other listed companies in general.
In Singapore, one such growth stock, in my books, is iFAST Corporation Ltd (SGX: AIY).
It was also picked as one of the Singapore shares to watch in 2020.
Here, let’s explore the company in-depth and why it looks attractive to me.
TL;DR: Is iFAST A Perfect Stock For You?
Some investment merits of iFAST:
- Scalable business
- Lots of recurring revenue
- Long runway for growth
- Reasonable 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 2019, it had assets under management (AUA) of S$10 billion.
Right now, iFAST has a presence in Singapore, Hong Kong, Malaysia, China and India.
iFAST has two main business divisions, namely, Business-to-Consumer (B2C) and Business-to-Business (B2B).
Together, the company offers more than 8,900 investment products including unit trusts, bonds, stocks and exchange-traded funds, 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 expense-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.
Recently, iFAST added two new recurring net revenue streams:
- Net interest income
- 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):
For FY2018, excluding China, iFAST’s net revenue grew 20% year-on-year while its net profit surged 31%. Including China, the company’s net revenue and net profit increased by 21% and 42%, respectively.
iFAST’s return on equity is also high at 18%, including the China business. This shows that the company’s management is effective in using shareholders’ money.
As of 30 September 2019, iFAST had S$22.1 million in cash with a total bank loan of S$10.4 million. With more cash than debt on its balance sheet, iFAST is highly likely to be able to tide through any tough economic conditions.
iFAST continues to generate copious amounts of free cash flow. For FY2018, free cash flow grew 35% to S$8.2 million, which is commendable.
iFAST’s Dividend History
iFAST’s dividend per share has grown 4% per year, from 2.79 Singapore cents in FY2015 to 3.15 Singapore cents in FY2018.
|Total dividend (Singapore cents per share)|
For the first nine months of 2019 (9M2019), iFAST paid out 2.25 Singapore cents per share in dividend, the same as the previous year.
iFAST’s Insider Ownership
As of 8 March 2019, iFAST’s co-founder, chairman and chief executive officer, Lim Chung Chun, had a 22.2% 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 mentioned earlier, the company’s AUA right now is at S$10 billion.
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.”
In 2020, China will be opening up its US$45 trillion financial industry, and that could give iFAST plenty of opportunities in the country.
On 3 January 2020, iFAST revealed that it has submitted an application to the Monetary Authority of Singapore for a digital wholesale bank licence here. The application was made together with Yillion Group and Hande Group from China.
Lim said in a press release about the application:
“By tapping on the unique strengths and experiences of each consortium member, we are confident that an iFAST-led digital bank will be well-equipped with the technological expertise, digital banking and wealth management capabilities to better address some of the inefficiencies, and assist the underserved market segments in Singapore’s banking industry.”
The iFAST-led digital bank will be up against companies such a consortium containing Singapore Telecommunications Limited (SGX: Z74) (Singtel) and Grab, and a consortium including Razer and founders of Sheng Siong Group Ltd (SGX: OV8). These companies will be vying for a total of five digital banking licences, and the competition looks intense.
If iFAST wins one of the licences, it will be another feather in its cap and an avenue to grow its business further.
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 is that if a bear market hits, iFAST’s AUA could be affected, just like during the great financial crisis of 2007 to 2009 (you can refer to the AUA chart above).
At iFAST’s share price of S$1.04 at the time of writing, it has a trailing price-to-earnings (PE) ratio of around 31 and a dividend yield of 3%.
Excluding the China business, iFAST’s PE ratio falls to about 20.
In my opinion, the PE ratio of 20 is acceptable given its high-quality business and a long runway for growth.
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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 may have a vested interest in the company mentioned.
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