Apple, Alphabet and Microsoft are the 3 largest companies in the world by market capitalisation as of the first quarter of 2018.
What do these three companies have in common?
They are all platform companies – companies that combine demand and supply and benefit from network effects.
Platform companies typically see huge growth in revenue, net profit and profit margins once they reach critical mass. The first investing stock in the Evergreen portfolio, iFAST, is a platform company as well!
iFAST is a Singapore-based company which owns and operates an online investment platform which distributes investment products in Singapore, Malaysia, Hong Kong and China. They allow investors to place more than 7,500 investment products which includes unit trusts, insurance, bonds, stocks and ETFs into a single, combined portfolio.
Source: iFAST 2017 annual report
When investors buy investment products from iFAST, the value of their investments is called AUA (Assets under Administration). Clients love the value offered by iFAST because AUA have increased 7x from 2005 until 2017. AUA is crucial for iFAST because recurring revenue is calculated based on a percentage of average AUA distributed on iFAST’s platforms, and mainly comprises trailer fees, platform fees and wrap fees.
Trailer fees are the largest source of recurring revenue (62% in 2017) and are paid by suppliers (eg. Fund houses) when clients buy and hold unit trusts. Platform fees are the second largest source of recurring revenue (27%) and are paid by investors.
Source: iFAST 2017 annual report
iFAST has two segments – B2B and B2C.
iFAST started with its B2C (Business to Consumer) business in 2000 through its Fundsupermart.com website that offers a huge range of investment products and research for retail investors. This business currently makes up 26% of AUA as of end 2017.
The B2B (Business to Business) division which contributes the remaining 74% of AUA caters to the needs of financial advisers, banks and company pension plans.
Why does this opportunity exist?
|In SGD millions||Net revenue||Net profit||Operating cash flow||Net profit margin|
iFAST’s revenue includes commissions paid to its B2B partners so only net revenue trends will be analysed as it better reflects the actual revenue received by iFAST.
iFAST was listed on SGX in end-2014 and had a promising start with revenue and net profit growing year-on-year in 2015. In 2016, iFAST decided to enter the Chinese market. The company’s expansion into China led to its net profit margin falling to 8.9% in 2017 compared to 14.2% in 2015. Investors fled and the share price has fallen by ~40% since its 2015 peak.
The network effect on iFAST is undervalued.
We believe the market is overly focused on iFAST losses in China and are ignoring its valuable core business in Singapore, Hong Kong and Malaysia. As an aggregator of investment products and services, iFAST enjoys strong network effects which in turn leads to massive growth potential. Network effect occurs when the value of a service increases for both new and existing users as more people use the service.
By aggregating demand for financial products, iFAST enjoys greater bargaining power when approaching product providers and becomes a more attractive distribution option to providers as it grows. Offering more financial products will lead to more investors choosing the iFAST platform to buy their investments.
Take a look at this quote from the iFAST IPO prospectus.
We believe our business model, while commonly seen in developed financial markets such as the US, Europe and Australia, is fairly unique in Asia. We differentiate ourselves from our competitors in the region by offering our Customers consolidated services that we believe can only be obtained from the concurrent engagement of several different service providers. For example, financial institutions can leave the administration, settlement, operational and transactional side of their business to our Platform as well as rely on our Platform to source investment products from multiple product providers and to arrange fees. Such financial institutions can then focus on their core business, including clients’ acquisitions, portfolio advice and service. In turn, we can aggregate the demand for Investment Products from the financial institutions we work with and enjoy greater bargaining power when approaching product providers with an aggregated number of Customers and leverage on an aggregated AUA. We believe this arrangement also benefits product providers, as our aggregation of Customers also reduces the number of parties they have to negotiate with and service. The consolidation of services we provide typically brings cost savings and efficiency to our B2B and B2C Customers as well as product providers.
B2B clients benefit from the iFAST model because they don’t have to sign individual distribution agreements with each product provider while iFAST provides transactional capabilities, execution and settlement functionality, efficient collection of advisory fees, and services which include research and seminars. On the other hand, B2C investors benefit from the convenience of using a single platform to research, trade and monitor their investments.
Network effect benefits imply that iFAST’s competitive advantage becomes stronger as it grows larger. Since its IPO, iFAST has expanded its range of products from unit trusts to bonds, ETFs, insurance and stocks. As a result, iFAST has become increasingly attractive to both investors and financial advisors with the number of investment products growing more than 3x from 2014-17 leading to a 36% increase in client accounts. A bigger client base will in turn make iFAST more attractive to investment product providers leading to a virtuous cycle of growth in clients and products.
As an online investment platform, iFAST has a scalable business model with net revenue growing faster than expenses once the company’s AUA reaches a certain level. This is already evident in the company’s results. If we exclude iFAST’s China segment, net margins have grown from 8% in 2011 to 27% in 2017.
Lastly, I think investors are undervaluing iFAST revenue and earnings growth potential from network effects based on a comparison with other online investment platforms.
Consider Hargreaves Lansdown (HL), the largest UK online investment platform.
HL and iFAST are similar in several aspects.
Firstly, both companies have achieved scale in their home countries. iFAST is the largest online investment platform in Singapore, Malaysia and Hong Kong while HL is the largest UK online investment platform by AUA.
Second, both companies operate in major financial hubs which provides plenty of room to grow their AUA. iFAST’s Singapore AUA as of end-2017 was SGD5.1 billion which is still small compared to the SGD82 billion of collective investment schemes managed in Singapore. With iFAST expanding its scope to include stocks and bonds, the total addressable market becomes even larger with SGD2.1 trillion of unit trusts, equities, bonds and cash managed by Singapore-based asset managers.
Lastly, iFAST and HL are not alone in their respective markets but both companies succeeded in consistently growing AUA. In Singapore, iFAST competes against two other investment platforms: Philip Securities’s POEMS and Aviva’s Navigator. HL also competes against more than 10 UK investment platforms.
|Hargreaves net profit||42||162|
|SGD million||2017||6 years later|
|iFAST net revenue||49.5||?|
|iFAST net profit||9.0||?|
|iFAST net profit (excl China)||13.2||?|
Let’s use 2008 as a starting point for HL which was their first full year as a publicly listed company. Within six years, HL quadrupled its AUA to GBP46 billion while client count almost tripled to 652,000 clients. Higher AUA led to revenue tripling to GBP 358 million from 2008 until 2014. The improvement in net profit and margins was even more impressive. Net profit quadrupled to GBP 162 million during the same period.
This HL example suggests that linear thinking is not suited to forecasting revenue and net profit growth for an investment platform company. Platform companies grow exponentially once they reach scale. With iFAST already achieving profitability in its core Singapore, Malaysia and Hong Kong markets, iFAST can triple or even quadruple its revenue and net profit over the next six years.
|Net profit (excl China)||13.2||29.4|
|China-related net losses||-4.2||-4.2|
|Total net profit||9.0||25.2|
With network effects and greater scale, it’s easy to imagine iFAST net revenue doubling by 2023. With most of its costs being fixed costs, net margins should grow to 30% leading to a net profit (excluding China) of around SGD29 million by 2023.
iFAST said in its 2017 results outlook that its 2018 losses for its China segment will be “comparable” to 2017. To be conservative, let’s assume that iFAST will continue incurring the same SGD4 million net loss even in 2023.
If we assume the company’s trailing P/E remains constant in 2023, that works out to a price target of SGD2.6 in 2023 which is a nice upside from current levels.
Dividends poised to grow
For 2017, total dividends per share was up 7.9% year on year to 3.01 cents per share which is 89% of 2017 earnings per share and 60% of net profit excluding its China segment. Management expects 2018 dividend per share to be higher because of year on year improvement in its core Singapore, Hong Kong and Malaysia markets. With its net cash position and strong operating cash flow, the company’s dividend is well covered and has room to grow.
Key risk: Market volatility
With unit trusts making up 92% of AUA as of end-2017, falling share prices may cause investors to sell their investments and withdraw funds. In the first half of 2016, the company’s net profit fell by 40% year on year while AUA fell 1.5% year on year due to challenging market conditions.
The risk of AUA withdrawals is partially mitigated by the huge variety of investments offered on iFAST’s platform which includes lower volatility products such as money market funds. Investors can switch between different investments so the new investment can still remain in iFAST’s investment platform. This implies that iFAST may not see the outflows of AUA that an asset manager would experience when the investor decides to sell their fund.
Share price catalyst
The strength of iFAST’s core markets in Singapore and Hong Kong should become too difficult to ignore by 2019 as stronger revenue and profit growth offsets the losses from the company’s China segment. Even if the company’s young China business does not improve, growth in its core Singapore market will help the company’s entire net profit to grow.
Lastly, iFAST’s resilient business model may become evident if share prices fall over the next two years. If iFAST is able to show AUA growth in a falling share price environment, investors may accord a higher P/E to the company.
iFAST is one of the few SGX-listed companies which benefit from network effects, has a long runway for growth and a good dividend track record. With its strong balance sheet and network effects strengthening its moat as it grows, iFAST will be a nice compounder to hold for the next five years.
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