iFAST: Bad 2Q22 results

iFAST reported a poor set of 2Q22 results because of an unexpected SGD2.69 million net loss due to an impairment for their India business.

Here are the good and bad points about 2Q22:

Good:

Assets under administration (AUA) remained stable in a bear market. AUA fell 5% q/q but rose 0.8% y/y to SGD17.6 billion with the company still attracting net inflows. iFAST attracted SGD593 million in net inflows (down 29% y/y) during 2Q22 mainly because of stronger B2B and B2C inflows in Singapore. This resilient performance in AUA is in line with my thesis. As iFAST diversifies AUA across stocks, bonds and cash, the company’s results should eventually become less dependent on market sentiment

China AUA growing again. iFAST China was the only segment which grew AUA q/q during 2Q22. China AUA grew 0.3% q/q and 0.7% y/y to RMB2.1 billion (SGD432.4 million).

“New highs” in 2023. iFAST expects revenue and profitability to grow to “new highs” in 2023 as the ePension segment starts to contribute more significantly from 3Q23 onwards. ePension profits will be crucial with poor market sentiment hurting AUA and inflows.   

Bad

iFAST India ban on pooling accounts. iFAST booked a SGD5.2 million impairment for its 41% associate investment because regulators have banned pool accounts for mutual funds. The India segment contributed less than 4% of AUA and was not a material part of my thesis. With iFAST writing down the India investment, iFAST can now focus on other priorities.

Here’s the bad news. India’s ban on pooling accounts for mutual funds highlights a risk that other countries may follow suit. This ban on pooling accounts for mutual funds was driven by concerns about investor funds being misused.  I haven’t seen other countries adopting such a model yet and the chances of that happening in Singapore and Hong Kong seems low because such a move would hurt the banking and wealth management industry while disrupting a country’s reputation as a financial hub.  A ban on pooling unit trust accounts in iFAST core markets would cripple the company’s ability to aggregate investor funds because unit trusts makes up 70% of AUA. Buying a UK digital bank to further diversify into cash deposits is absolutely the right move because it will make the company less dependent on unit trusts.  

Higher group operating expenses. iFAST is guiding for a substantial drop in net profit during 2022 because the company is preparing for the ePension business to become operational in 2023 and “opportunities arising from a more globalised wealth management and digital banking business model”. iFAST China losses were also higher q/q with a pretax loss of SGD1.8 million in 2Q22 vs SGD1.7 million in the first quarter. UK pretax loss was SGD1 million as guided. iFAST is aiming for the UK digital bank to roll out online account opening over the next two to three quarters so I’m looking forward to more net interest income.

Summary

In short, this was a bad quarter. There’s a risk that management may include even more impairments during the second half of 2022 after guiding for weak profitability during 2022. The good news is that ePension profits should arrive in 2023. The India impairment was disappointing but not a thesis killer for me. Profits from the India and China segments were not part of my investment thesis. My view was that these segments would either become profitable or be closed. Either way, the losses would end.

This quarter’s results has highlighted two key risks. (1) Lower than expected ePension profits and (2) Regulatory risk affecting financial advisors and mutual funds pooling. I’ll be watching these risks closely because it could change my thesis. iFAST is still the largest position in my portfolio so it will be tough for me to add in size but I’m certainly not selling! I may buy more shares if the share price approaches SGD3 levels which was a level when iFAST had yet to secure their profitable Hong Kong ePension contract.

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