iFAST: 3 myths about 2Q 2020 results

iFAST share price is up 26% in the last month which has led to many questions about the company. Here are 3 common misconceptions:

Myth 1: iFAST will grow 80% every year

iFAST reported great set of results for the second quarter of 2020 which warmed the cockles of my heart. Net revenue grew 21% year on year and net profit grew 84% because of record inflows and stock/ETF trading commissions.

iFAST net inflows

Net inflow of client assets in the first half of 2020 has already exceeded 2019 levels probably because investors sense a bargain in equity markets. I like the company’s move to attract investors with at least SGD100k assets by offering a flat SGD10 fee for trading Singapore stocks/ETFs. That’s dirt cheap. Imagine paying only a SGD10 fee to buy 1 million DBS shares! With more wealthy investors joining the platform, iFAST should be able to cross-sell more lucrative products such as unit trusts and bonds.

iFAST is aiming for assets under administration (AUA) to reach SGD100 billion by end-2028 which implies ~29% annual growth rate from its end-2019 levels. This is in-line with the company’s 2018-19 AUA growth and should be possible given the company’s presence in major wealth management hubs like Singapore and Hong Kong. iFAST’s SGD11 billion AUA has plenty of room to grow compared to Singapore’s overall wealth management market (SGD3.4 trillion) and unit trusts (SGD100 billion). Based on the growth profile of other wealth management platforms such as Charles Schwab and Hargreaves Lansdown, iFAST still has a huge runway ahead. In short, don’t expect 84% growth every quarter but 20-30% growth is certainly possible.

Myth 2: Digital bank license will only lead to losses for iFAST.

First, don’t get excited about iFAST winning a Singapore digital wholesale banking license. I think they have a 10-20% chance of getting the license.

iFAST is guiding for expenses to go up by 9-11% in 2022 if they win a license so there have been concerns that the company could incur losses for many years. Focusing on increased expenses related to digital banking is a bit like focusing on higher expenses during Christmas. It’s not the point!  Being able to offer banking services will super-charge the iFAST wealth management platform. Earning interest income is just one option for a digital bank. iFAST can also sell wealth management products (eg. bonds, cash management accounts) to the companies or to individual owners/senior managers of Singapore’s smaller companies.

Myth 3: iFAST is an expensive stock

iFAST is trading at 35x trailing earnings or 26x trailing earnings if we exclude losses from China operations. A 35x trailing PE is at the higher end of the company’s historical valuation but I’m happy to hold on to my shares because earnings should compound at 20-30% over the next five years even if they don’t get a Singapore banking license.

In short, winners win. I wouldn’t rush to buy a full position at current levels but a 1/3 position at 35x PE seems like a fair price for a fintech company which grew 84% during a global pandemic!

One thought on “iFAST: 3 myths about 2Q 2020 results

  1. The beauty of platform business like ifast is that once the critical mass is reached, incremental revenue increase all goes to the net profit as marginal cost is close to zero!

    Watch out for the China segment . If u plot the trajectory of China AUA every quarter for the past few years, u can notice that the jump from Q1 2020 to Q2 2020 was very significant.

    I expect the critical mass AUA for China segment to be reached in around mid 2021. Need a bit of patience here ….the positive effort of Raffles Family Office is going to take the market by storm soon…

    The net gain in EPS from China segment (turning from losses of 4.5mil to zero loss) = 1.7 cents or gain in valuation of 40 cents assuming PE of 25.

    Once China segment turns into massive profit, one can only imagine the huge net profit !!!

    Like

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