iFAST 2Q21: Good but not great

iFAST second 2021 results were decent but not good enough for the company’s high valuation. Most of the company’s key metrics including net revenue and profit were up year on year but down quarter on quarter because of lower stockbroking commissions. This sequential decline in net profit broke the company’s winning streak where net profit grew sequentially for 9 consecutive quarters.

TLDR summary: I’m a bit disappointed but I’ll be looking to add more shares on weakness. iFAST is making all the right moves to be a regional wealth management Fintech (eg. cutting fees, adding stockbroking services, digital banking license bid, Hong Kong MPF contract). iFAST is in the right place at the right time. This quarter is just a speed bump in their compounding journey.  

From iFAST

“The Group’s assets under administration (“AUA”) continued to register new record levels, reaching S$17.54 billion as at 30 June 2021, a growth of 57.3% YoY and 21.4% YTD. The AUA of unit trusts, our key investment asset class, grew to a record S$12.87 billion, a growth of 48.7% YoY and 18.0% YTD.

As a result of the increasing AUA, the Group’s recurring net revenue has continued to grow at a robust pace, increasing 39.2% YoY in 2Q2021 and 34.3% YoY in 1H2021. Growth in non-recurring net revenue however moderated in 2Q2021, increasing 15.3% YoY in 2Q2021, compared to a more robust growth of 59.8% YoY for 1H2021 as a whole.”

Here are the good and bad points about these quarterly results.

Good

• Unit trust AUA grew 48% year on year (y/y) and 8% quarter on quarter (q/q) which resulted in higher recurring revenue. Growing unit trust volume should also lead to higher recurring revenue in the future. iFAST is paid a recurring trailer fee based on average assets under administration.
• Number of client accounts grew 5% q/q to 620,000 accounts but this is a slower growth rate compared to the 7% q/q and 10% q/q growth seen in 1Q21 and 4Q20.
• Quarterly dividend is 47% y/y and 10% q/q higher.

Bad

• Total non-recurring revenue was up 18% y/y but down 32% q/q during 2Q because of poor market sentiment in all key markets. This trend is consistent with revenue trends at other wealth management companies such as Interactive Brokers and UBS where wealth management revenue was lower q/q. Slower growth for non-recurring revenue was also partly caused by the Singapore segment introducing a flat SGD8.80 fee for all SGX-related trades. This move is painful but necessary in my view. In the long run, lower stockbroking fees will attract more investors which should eventually lead to more recurring income from interest income and increased unit trust sales.
• Malaysia posted a surprisingly 11% quarter on quarter decline in revenue despite the segment introducing Bursa Malaysia stockbroking services. iFAST said the weakness was caused by “stricter movement control measures” and lower unit trust and bond sales. But iFAST is working hard to attract more investors with the Malaysia B2B division planning to launch US and Hong Kong stockbroking services. The B2B segment is also upgrading its mobile application which will have “enhanced user experience, a more user friendly interface, and better performance”.
• China’s net revenue grew 77% y/y but was down 35% q/q because of “volatility in the A-Shares market”. Pretax losses remained flat at SGD1.4 million though. I think growing the China segment will be long slog but China’s wealth management market is massive so the rewards will be huge. I’m reminded of Chin’s words from The Smart Investor “Starbucks was unprofitable in China for nine years. Patience.”

Short term and long term view

Overall, second quarter 2021 results was good but probably not great enough given the recent spike in share prices and iFAST’s 91x trailing PE. There could be some share price weakness this week but I’m definitely not selling. Worst case scenario: iFAST drops to SGD5.60– the price at which iFAST’s CEO bought 50,000 shares.

Upcoming catalysts include news on the Hong Kong MPF contract which could have a long term benefit for the Hong Kong segment from 2024 onwards and Malaysia digital banking license developments. More stockbroking services in Hong Kong (China Connect) and Malaysia (US and Hong Kong) may also revive growth in non-recurring revenue. These moves will cement iFAST’s status as a regional wealth management Fintech which is a great strategy in an increasingly borderless and digital world.

In short, iFAST is in the right place at the right time.  I’m confident the company will be a long term compounder and this stock is still the largest position in my portfolio.