Why MPF is only the start for iFAST

iFAST is already the largest position in my portfolio but I’m still looking to buy more shares this week after reviewing third quarter 2021 results.

Guidance on the impact of the Hong Kong MPF contract was the main focus of 3Q 2021.

iFAST’s ePension segment will be providing operation and administration services for MPF. These services will result in huge recurring service fees for iFAST but will not contribute to the group’s AUA (Assets under Administration).

From iFAST:

Given the Group’s expectations that the growth rates of its overall Hong Kong business will accelerate in the next five years, the Group has decided to share its targeted Hong Kong revenue and PBT margins for 2024 and 2025. In 2024 and 2025 respectively, the Group targets to achieve gross revenue of >HKD1 billion and >HKD1.5 billion, net revenue of >HKD800 million and >HKD1.2 billion, as well as PBT margin of >15% and >33%.

The following table summarizes the SGD impact of iFAST targets for its Hong Kong business.

iFAST Hong Kong (SGDm)	2020	2024	2025
Revenue	43	170	255
Net revenue	19	136	204
Pretax margin	30%	15%	33%
Pretax profit	6	20	67
Taxes	-1.0	-3.4	-11.1
Net profit	5	17	56

The impact of the MPF contract is massive because pretax profit for the Hong Kong segment is expected to reach SGD67 million in 2025 which is 10x of 2020 levels. Using Hong Kong’s 16.5% corporate tax rate – the Hong Kong (HK)  segment could contribute SGD56 million net profit which is more than double the group’s LTM (Last Twelve Months) net profit (SGD30 million). Many analysts were expecting a SGD10-20 million net profit contributions from MPF so this profit guidance was higher than expected.

iFAST has a good chance of meeting or even exceeding these Hong Kong segment revenue and profit targets because maintaining a wealth management platform is the company’s core business. iFAST also has prior experience in developing an online unit trust platform for the Malaysia pension fund (EPF) during 2019.

This MPF contract could be the “Amazon Web Services” moment for iFAST when investors realize there’s a huge and profitable (33% pretax profit margin!) IT software business hidden within the company. The cash flow from this segment creates a floor on the company’s valuation and provides more resources to grow the platform. There’s definitely revenue concentration and execution risk but a successful delivery of this MPF contract could lead to more of such ePension contracts in the future.

iFAST 2025 valuation

Based on management’s targets, here’s a guess at iFAST overall earnings and share price in 2025. These are my assumptions:

• Group AUA reaches SGD50 billion in 2025 based on 27% CAGR. A 27% annual growth rate is needed to meet their SGD100 billion AUA target by 2028
• Hong Kong AUA is 17% of group AUA in 2025 which is the same percentage as 3Q 2021.
• Group AUA excluding HK assets is SGD41 billion
• 2025 Net revenue per AUA take rate lowered to 0.6% because of more stocks in AUA.
• 2025 Net revenue excluding HK reaches SGD67 million
• 2025 Pretax margins excluding HK expands to 37% because of operating leverage benefits. Hargreaves Lansdown and Charles Schwab earned 69% and 37% pretax margins respectively in 2020 and both are mature wealth management platforms.
• 2025 group net profit reaches SGD131 million in 2025
• PE multiple drops to 40x.

SGD million	iFAST 2020 ex HK (SGDm)	iFAST 2025 ex HK (SGDm)	iFAST HK 2025 target (SGDm)	iFAST  2025 (SGDm)
AUA	11,800	41,500	8,500	50,000
Net revenue/AUA	0.75%	0.60%	–	–
Net revenue	67	249	204	453
Pretax profit	20	92	67	159
Pretax margin	29%	37%	33%	35%
Net profit	–	76	56	131
Earnings per share	–	–	–	0.46
PE (TTM)	–	–	–	40
Share price (SGD)	–	–	–	18.4

In short, the MPF contract creates a floor for iFAST future earnings and it’s a very high floor! iFAST share price is likely to be at least SGD18 by 2025. If operating leverage results in pretax margins exceeding 37% or a higher PE multiple, the share price could easily exceed SGD30. 

The MPF contract will not last forever though and is scheduled for renewal in 2030 with an option to extend for 1-2 years. iFAST will have many years to negotiate a renewal while growing its core business. There’s also a chance that iFAST will operate and maintain the MPF platform for the long-term given the company’s existing involvement.

Even without MPF, iFAST could still be a multi-bagger in the next few years because of their efforts to attract and retain investors.

Growing the iFAST eco-system

I was excited to see iFAST announcing plans to enlarge the company’s eco-system and improve user retention. These plans include pursuing more licenses such as a digital banking license and a bond exchange license.

iFAST said the company is keen to pursue more banking licenses in “one or more jurisdictions” because the biggest distributors of wealth management products tend to be banks.

iFAST also revealed that the company is applying for a “Recognised Market Operator’ licence to create a bond exchange. Creating a bond market place for individual investors would be a game-changer because bond liquidity for retail investors is limited with bonds typically requiring a minimum investment of SGD250,000 in Singapore. Meanwhile electronic bond exchanges such as MarketAxess and Tradeweb mainly serve institutions. iFAST is familiar with bond trading constraints because iFAST has been forced to become a bond dealer in Singapore to create liquidity for its retail investors who are accustomed to smaller order sizes.

Let’s summarize the company’s 2021 efforts to improve their eco-system:

• Launching Malaysia stockbroking business and China Connect for Singapore/HK users.
• Growing iGM, their in-house wealth advisor headcount 46% y/y in 2021.
• Acquiring DWS fund management to create unique co-branded funds and cash products.
• Securing the Hong Kong MPF contract increases recurring earnings and resources for reinvestment.
• Bidding for a digital banking license in Malaysia to improve distribution.
• Applying for a bond exchange license to improve retail bond liquidity.
• Creating iFAST Academy, a series of webinars by popular bloggers to educate customers and improve retention.
• Developing iFAST TV, a social media channel to educate customers and increase brand recognition.

Each part of the eco-system reinforces the iFAST flywheel. More customers signing up for stockbroking services could result in unit trust sales growing in the future because customers may be keen to diversify into other markets. Having unique cash management funds may attract new users to invest cash with iFAST and to use the cash to buy stocks and unit trusts on iFAST platforms.

In short, the MPF contract is only the beginning for iFAST because it creates a high floor for future earnings, increases awareness of the company’s technology capabilities and allows iFAST flexibility to reinvest in their eco-system. iFAST is playing chess while their competitors are playing checkers.