iFAST will be reporting third quarter 2021 results soon and results are likely to be so-so.
iFAST non-recurring revenue is usually correlated with trading volume from major stock brokerages such as Interactive Brokers. iFAST releases results on a quarterly basis but Interactive Brokers (IBKR), which operates in all major iFAST markets releases monthly updates.
Based on Interactive Brokers’ monthly volume reports, iFAST’s non-recurring revenue is likely to be down quarter on quarter but up year on year. The main upside risk to my forecast involves stockbroking volumes from iFAST Malaysia customers. iFAST launched a stockbroking service for the company’s Malaysian customers in March 2021 anda strong uptake could lead to higher non-recurring revenue for iFAST.
Why is non-recurring revenue so important for iFAST? High operating leverage. Once iFAST covers their fixed costs for stockbroking, every dollar of incremental revenue flows straight down to net profit. However, a decline in revenue will result in an equally large contraction in profit.
I’m guessing iFAST will report SGD7 million net profit which will be flat quarter on quarter but up 15% year on year. With the stock currently trading at 91x trailing PE, that’s probably not good enough for investors.
iFAST has already been a 9-bagger for me. So why am I still holding my shares?
Here are a few reasons:
- MPF earnings impact may be disclosed during the 3Q results briefing
- A customer-obsessed culture
- SGD100 billion AUA target by 2028
- Malaysia digital bank license
MPF earnings impact
Firstly, iFAST may disclose the earnings impact from the company’s MPF contract during 3Q results which could be a game-changer for iFAST.
“The Mandatory Provident Fund Schemes Authority (“MPFA”) of Hong Kong announced on 29 January 2021 that it has awarded PCCW Solutions Limited (“PCCW Solutions”) with the contract for the design, build and operation of the eMPF Platform. The eMPF Platform aims to standardise, streamline and automate the MPF scheme administration processes to create room for fee reduction and a predominantly paperless experience in the MPF System.
iFAST Corporation Ltd. (“iFAST” or “iFAST Corp” or together with its subsidiaries, the “Group”) would like to share that the Group had participated in the tender for the eMPF Platform project with PCCW Solutions as their Prime Subcontractor for a category that includes MPF scheme operation services, transformation services and user delivery services.”
iFAST has not shared any details but has indicated that the MPF contract will have “a very material financial impact or the years 2023/2024 and beyond”.
Various sources have reported that the winning MPF platform operator will take a fee based on the system’s total assets. The bids were in the range of 20-35bps and based on MPF’s asset pool of HK$1170 billion as at March 2021, this works out to at least SGD407 million of revenue for the PCCW/iFAST consortium. The implementation period is scheduled for completion in 2022 and a 7 years operation and maintenance period which could be extended.
Here are my assumptions for MPF:
- Consortium gets 0.2% of total assets
- iFAST gets a 20% share of consortium revenue
- iFAST earns a 15% pretax margin on MPF revenue which is conservative since most software companies normally earn a 30-35% pretax margin.
|MPF earnings estimate||SGD million||Comment|
|MPF assets||203,580||End-March 2021|
|MPF consortium fees||407||0.2% of assets|
|iFAST annual revenue||81.43||20% share of consortium fees|
|Taxes||(2.02)||16.5% HK corporate tax rate|
|Net profit||10||2023 onwards|
Based on these assumptions, the 2023 net profit impact for iFAST could potentially increase by at least SGD10 million per year which amounts to a 35% increase in their trailing net profit. If I use a 30% pretax margin assumption instead which is consistent with financial software companies like Silverlake Axis, the net profit contribution could potentially be worth up to SGD20 million or a 70% jump in trailing net profit.
In short, the MPF contract could potentially be a game-changer for iFAST. A successful MPF project outcome may also result in iFAST winning similar contracts from other pension funds.
A customer-obsessed culture
iFAST is launching several initiatives to improve customer experience and increase switching costs. This is in line with their obsessive focus on improving customer experience.. Consider some recent iFAST projects this year:
- Acquiring DWS Singapore, a fund manager to unlock new products. For example, iFAST can launch a cash management fund which has faster settlement and redemption capabilities because of their in-house infrastructure.
- Creating FSMOne Investment Academy, a platform which allows customers to redeem reward points for financial literacy webinars. These sessions are conducted by popular investment trainers such as Fifth Person, ValueInvestAsia and Smart Investor.
- Reducing SGX stockbroking fees to a flat SGD8.80 stockbroking fee for all customers
- Reducing HKEx stockbroking fees to a flat HKD50 stockbroking fee for Gold and Diamond customers
- Launching iFAST TV, an investment-focused video channel on Facebook and Instagram.
I think the endgame for iFAST is to become the Netflix of wealth management. Like Netflix, iFAST will have their own “Original” products while aggregating demand across multiple countries. This is a tried and tested playbook by other wealth management platforms in the United States and UK. Charles Schwab and Hargreaves Lansdown aggregated demand and supply by offering Low fees, having a “customer first” culture and successfully launched their own products in US and the UK.
The result? Win-win-win
Customers win because of lower prices and a wide product variety.
Suppliers like fund managers are happy because they gain access to a large and growing pool of customers at a reasonable price.
The platform wins regardless of customers choosing their products or third party unit trusts as long as the money stays on the platform.
SGD100 billion AUA target
I previously wrote about a scenario where iFAST can still be a multi-bagger even if there’s zero impact from MPF. Here’s an extract.
iFAST has a vision of achieving SGD100 billion assets under administration by 2028. In 2028, iFAST hits this SGD100 billion AUA target and achieves SGD595 million net revenue based on its existing 0.6% take rate.
Earnings per share reaches SGD1.1 based on the pretax margins of mature peers such as Hargreaves Lansdown. Investment platforms such as iFAST tend to grow earnings exponentially once they reach scale because of their fixed costs and limited variable costs. I’ve assumed a 55x trailing PE which leads to a SGD63 share price because of its growth profile and presence in growing Asian wealth management hubs such as Singapore, Hong Kong and China. Even at SGD100 billion AUA, the company will still be smaller than its peers such as Charles Schwab and Hargreaves Lansdown.
Malaysia digital bank
I previously shared why iFAST has a 50% chance of winning the Malaysia digital license because of its strong local content, wide distribution network and focus on the bottom 40% (B40) population in Malaysia. I think it’s a 50% chance that iFAST will win a license because the competitors include consumer Internet giants and financial companies such as Grab, Sea Limited and RHB Bank. Successful applicants will be announced on the first quarter of 2022.
In short, the next few months will be an exciting time for iFAST! This stock is still the largest stock in my portfolio and I’ll be watching 3Q results closely.