Is iFAST (SGX: AIY) still overvalued?

2021-07-29     drwealth
Is iFAST (SGX: AIY) still overvalued?

iFAST (SGX: AIY)’s share price had been on a remarkable run.

Every time we thought the share price was high, it climbs even higher. If you bought this stock a year ago and held it till 23 Jul 2021 (the point of writing), you would have made a 423% gain! This is phenomenal considering that Singapore stocks tend to be more tamed in their returns.

But alas, iFAST’s latest earnings results did not meet investors’ expectations and it fell by about 10%:

Are they still overvalued, or is this a good chance to get in before the next run? I’ll share my analysis of their business and valuation of iFAST here. But first, let’s take a look back at the many events and news that lead to today’s iFAST stock price.

8 Key events that influenced iFAST’s share price

As you can see from the chart below, iFAST share prices did not rise or fall at a steady rate. Instead, there were several outbursts, indicating multiple catalysts that caused the share price to spike. So, let’s see what these are.

1) Digital Bank Licence Application Rejected (-25% drop)

On 5 December 2020, iFast experienced a significant decline of -25%. This occurred following iFAST’s announcement that its application for a Digital Bank Licence had been denied.

With the synergy between iFAST’s business and digital banking, investors were more than hopeful that iFAST and its consortium would be awarded the digital wholesale bank (DBW) licence. Such optimism has been shattered by the news, which led to its share price to tumble.

Moving forward, MAS may give additional DWB licenses in the future. However, for now, iFAST will be unable to enter the market.

2) Announced significant AUA growth (+68% gain)

On 6 January 2021, iFAST made a general announcement and recorded a 44.5% year on year growth in AUA to a record high of $14.45 billion, as of 31 December 2020.

On a quarter on quarter basis, this was a 14.8% increase from $12.59 billion, as of 30 September 2020.

Breaking down into its different markets, iFAST’s AUA has shown significant growth with its Singapore operations, its largest contributor seeing AUA increase by 52.8% year on year to $10 billion.

Unit trusts remained as iFAST main revenue generator, accounting for 75.4% of the group’s AUA. Similarly, its unit trust products have done well, with its AUA increasing 31.8% year on year.

3) PCCW Solutions awarded eMPF project (+35% gain)

Another positive news.

iFAST, on 30 January 2021, announced that the Mandatory Provident Fund Schemes Authority (“MPFA”) of Hong Kong has awarded PCCW Solutions with the contract for the design, build and operation of the eMPF platform.

The MPF is a mandatory saving plan similar to Singapore’s CPF, and the eMPF platform intends to standardize, streamline, and automate the MPF scheme administration operations to reduce fees and provide a largely paperless experience in the MPF System.

Being PCCW Solutions’ prime subcontractor would mean that iFAST could get a cut of the income fee, which DBS estimates to be in excess of $10 million.

More details on this eMPF project will be announced by the end of the year where iFAST would provide some guidance on the potential growth of its overall Hong Kong business for 2023/2024 and beyond.

4) iFAST reports strong performance at AGM (+10% gain)

On 22 April 2021, iFAST released its first-quarter results and held its Annual General Meeting on 23 April 2021.

Once again, iFAST had announced a strong performance which pushes its share price further up. The company has recorded a net revenue and gross revenue increase of 51.4% year on year and 43.8% year on year.

Additionally, it recorded a net profit of $8.82 million, a 142.5% increase compared to 1Q2020. Profit growth was significantly higher than revenue growth, demonstrating the group’s positive operating leverage where iFAST has reached economies of scale.

In its statement, iFAST has also anticipated strong growth in business performance for the full year 2021 compared to 2020, which could increase its dividend per share in 2021 compared to 2020.

For greater detail on iFAST growth, the table below shows how each geographical region has grown for the past four years.

5) No clear reasons for price spike on 17 May 2021 (+35% gain)

Well, I couldn’t find any good reasons for the spike between 17 May 2021 to 31 May 2021.

The closest SGX announcement was basically regarding the acquiring and depositing shares (which is common), and a general announcement of its AGM which was held on 23 April 2021.

Not convinced, I searched online by narrowing the search to 17 May to 31 May and here is what I found.

A news article by Bloomberg:

Titled ‘Singapore Broker Up 552% In a Year Eyes China for More Gains‘, the article talks about how iFAST’s shares have been Singapore’s best-performing stock over the past 12 months, beating all members of the FTSE ST All-Share Index.

The article talks about iFAST’s bet on China and its retail-trading frenzy, which could help grow assets by more than fivefold by 2028.  Lastly, the piece ended on a good note stating iFAST shares are primed for more gains despite the surge last year.

Did this news bump iFAST price up, or did I miss something out?

I do not know, but it is pretty crazy if a news article can cause such a significant jump.

6) iFAST announced its intension to apply for digital bank licence in Malaysia (+5% gain)

On 30 June 2021, iFAST announced that it is leading a consortium to apply for a digital bank licence in Malaysia. To bring your attention, iFAST had previously failed to obtain a digital wholesale bank licence in Singapore and another earlier attempt in Hong Kong. Well, nonetheless, the market was thrilled upon receiving this news.

The consortium mainly comprises Malaysian partners, namely Koperasi Tentera (one of the largest credit co-operatives in Malaysia), THZ Alliance Sdn. Bhd (private investment holding company), and Mr Lee Thiam Wah, founder and major shareholder of 99 Speed Mart Sdn. Bhd (Malaysia’s homegrown grocery chain).

They are one of the 40 plus contenders vying for up to five licences, which will be announced in 2022. Its competitors include Malaysian telco Axiata, budget airline AirAsia, and a joint venture between Singtel and Grab.

If the deal goes through, iFAST will possess a 40% interest in the digital bank.

Given that the Bank Negara Malaysia has stated that it will give preference to applicants whose controlling equity interest in the digital bank is held by Malaysians, iFAST appears to have an advantage.

However, I am confident that iFAST’s vision is not limited to Malaysia. It will almost certainly wish to grow into additional markets in the future. When that day comes, will iFAST bid with its current consortium, which is highly specialized in Malaysia? Or will they form a new partnership, which may require creating a new system?

7) iFAST announced date of earnings release (+14% gain)

Most recently on 8 July 2021, iFAST announced the date of release of its upcoming earnings for the second quarter. There wasn’t any release of earnings yet.

However, its share price spiked, which could be an indication of investors speculating another bumper quarter.

8) iFAST announced its 2Q2021 earnings (-6% drop)

As of 30 June 2021, iFAST’s AUA had reached a new high of $17.54 billion, up by 57.3% year over year and 21.4% year to date.

On 23 Jul 2021, iFAST announced its earnings performance for 2Q2021.

The group’s recurring net revenue has continued to rise rapidly due to the rising AUA, growing 39.2% year on year in 2Q2021 and 34.3% year over year in 1H2021. Non-recurring net revenue growth, on the other hand, slowed in 2Q2021, reaching 15.3% year over year, compared to 59.8% year on year for the first half of 2021.

In the second quarter of 2021, net profit increased by 55.0% year on year to $7.02 million. In the first half of this year, net profit increased by 94.0% year on year to $15.84 million. PBT margin has also improved to 34.2% for 1H2021, compared to 29.6% for 2020.

Lastly, iFAST declared a dividend of 1.10 cents per ordinary share for 2Q2021, up 46.7% year over year from 0.75 cents per ordinary share in 2Q2020.

Despite the excellent results, iFAST’s stock price fell after the release of its earnings.

This is likely because the results did not meet investors’ expectations, the slowdown in its operations during this period when the market is more cautious.

iFAST’s Fundamentals

As you see, the gains we have seen from iFAST are not purely driven by fundamentals. Instead, like all other stocks in the market, it is caused by sentiment.

Every time a piece of news appears, iFAST seems to keep going up. This leads to the question, has iFAST share price detach itself from its fundamentals?  

Let us take a look!

Financial results

An overview of iFAST’s revenue shows how fast the company has grown over the last four years.

If iFAST can maintain its 1Q2021 revenue for the coming three quarters, it could potentially cross the $200 million mark and hit a new record.

Its Profit Before Tax (PBT) margin has also been increasing, suggesting that iFAST has achieved economies of scale in its operations.

An increasing operating cash flow means iFAST is generating more cash from its businesses which can then be used to further invest in the business like its expansion into China.

iFAST’s revenue can be classified into recurring and non-recurring.

Its recurring income mainly comes from trailer fees, platform fees, wrap fees, and net interest income. On the other hand, its non-recurring income comes from its transaction fees of unit trusts, bonds, stocks and ETFs, Forex conversions fee and insurance commissions.

It is comforting to see more than two-thirds of iFAST’s net revenues are recurring in nature. This means that majority of its revenue is not one time off and would continue to increase as iFAST grows its AUA.

iFAST’s Growth

iFAST’s China operation is still making a loss. Nonetheless, it is still in its early stage and iFAST is still building its brand there.

Given its expertise in various markets, the chances of success in China seems promising and considering the vast market size; it could generate a large chunk of its revenue in the near future.

We should also not forget about Singapore. Indeed, the Singapore market is small, and many may think there isn’t much more room to grow here. However, from a DBS report, it is said that iFAST current AUA is only about 10% of the collective investment schemes in Singapore. Moving forward, iFAST could continue to capture more market share here and generate higher revenue from the Singapore market.

Somethings to note about iFAST’s China Operations!

Compared to Singapore and Hong Kong, where various investment products such as equities and ETFs are available, unit trust is currently the only product available in iFAST China.

Though the management has stated that it will seek other products as opportunities arise, it is unclear whether the Chinese regulator will provide this license. In other words, iFAST’s expansion in China may be highly dependent on Chinese regulator decisions.

As mentioned, its China business is still a loss-making one and the loss has widened in 1Q2021.

In addition, iFAST has stated the possibility that the losses in 2021 may be higher than 2020 and that its China business is unlikely to reach profitability in 2021 or 2022.

Next, while not its direct competitor, there has been a rise in new players in the industry, namely Tiger Brokers and MooMoo. These brokers provide much more attractive pricing, which may impact iFAST business.

Even if such brokers don’t bring as much threat to iFAST since transaction fees only make up a small part of its revenue, it shows how fintech could easily change the whole financial landscape. There will be more disruptive technologies in years to come and iFAST must adapt fast or risk being obsolete.

iFAST’s Valuation – can buy?

Base on iFAST’s trajectory, I would categorize it as a growth company. Should investors be considering it now?

Discounted CashFlow Model

Using the Discounted Cashflow model with a revenue CAGR of 22%, Finbox is forecasting its fair value to be $6.17.

At its current price, this is around 31% overvalued.

Price to Earnings

A company with growing earnings should see its share price appreciate in tandem.

However, what we observe with iFAST is an over anticipation that it will continue to expand beyond its earnings. The current P/E of 81 is way above its historical average of 32.

At this rate, if iFAST fails to deliver any exceptional results, we could very much see its share price revert to means. (which means a crash!)

Want to short iFAST?

Are you thinking of shorting iFAST because you find it overvalued?

It is not advisable to do a direct short on the stock as you need to close the position within the day.

Also, shorting is riskier than going long because it can give you unlimited losses theoretically. iFAST may also go higher for a long time before you are right. You will need to put up a small position without risking too much.

Want to long iFAST?

Some investors may trade on momentum – Who is to judge if iFAST is overvalued? The market knows better and what’s high can go even higher. iFAST can continue making new highs. Going to $10? Why not?

But what is consistent is that momentum investors are often quick to get out of a position when the trend reverses. You would need advance order types in order to execute such a strategy.

I’ll wait for now

Being a fundamental investor, I would sit on the sidelines for this as the risk the reward ratio is not that great, in my opinion.

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