IFast's lack of near-term catalyst spurs downgrades, better prospects seen from Hong Kong

As iFast Corp’s share price continues its decline, DBS Group Research analyst Ling Lee Keng has downgraded her recommendation to “hold”with a lower target price of $5.42 from $8.75 previously. Ling’s report on April 26 is a reversal from her optimistic view just a day earlier.

“After the 1QFY2022 ended March results briefing, the group reiterated its four-year plan but near-term catalysts are lacking,” she writes.

In addition, the bidding for the digital bank licence in Malaysia is likely to be off, with management stating that “it is fair to assume that [the bidding] was not successful”.

In the near term, iFast has guided for moderate growth in its net revenue in 2022 with a decline in profitability.

The company reported higher-than-expected operating costs due to the various initiatives in 1QFY2022 ended March 31, including the UK bank acquisition and the ePension project, all of which led to a lower net margin of 14%. “This trend is likely to stay as these initiatives are part of the overall planning,” she adds.

As such, Ling has trimmed her pre-tax margin assumption to 12.1% (from 13.8%) and 13.1% (from 14%) for FY2022 and FY2023 respectively. In contrast, iFast fetched 16.6% in FY2021.

With this in mind, Ling has lowered her earnings estimates for iFast by another 12% and 6% for FY2022 and FY2023 respectively. Her lowered target price is to account for the cut in earnings, and higher weighted average cost of capital (WACC) on the back of the rising interest rate environment, and slower growth.

In spite of its 30% drop in share price this year to date, iFast is still trading at a relatively high valuation with a P/E of 63.8x and 42.9x for FY2022 and FY2023 respectively.

“Its current P/E valuation is still above the four-year average P/E of 40x and higher than global peers like Charles Schwab and Hargreaves, which trade at an average forward P/E of 18.7x for FY2022 and 15.9x for FY2023,” the analyst writes.

“The high valuation is partly due to the current scale of the business, which is not at an optimal level yet. We expect valuation to improve as various initiatives start to bear fruit,” she adds.

Ling remains upbeat on iFast’s longer-term prospects, as she sees strong growth momentum in the company’s earnings from 2023, propelled by its business in Hong Kong.

“The group expects a robust ramp-up in profitability between 2023 and 2025 as maiden contributions from its new ePension division in Hong Kong come onstream. Longer-term plans are still intact,” she notes. “These include growing its assets under management (AUA) to $100 billion by 2028; to accelerate Hong Kong growth, propelled by the ePension project; add digital banking and other capabilities; and building a global business model.”

Further to its report on April 25, Citi Research analyst Tan Yong Hong has lowered his target price on iFast to $4.20 from $5.20 previously.

The company’s core business is valued at $3.10 per share, and its Hong Kong eMPF platform is valued at $1.10, writes Tan.

Keeping his “sell” call, Tan notes the decline in iFast shares, which fell some 6% after its 1QFY2022 earnings were released.

Following a briefing conducted by iFast’s management, Tan has lowered his EPS estimates by 17%, 23% and 20% for FY2022, FY2023 and FY2024 respectively.

Labelling the counter as “high risk”, Tan notes that the current bear market is negative for iFast’s earnings.

“[Our] earnings downgrade is driven by lower revenue expectations (soft AUA growth rate and weak net platform margins). Management guides lower absolute profitability for FY2022 on weak markets conditions and BFC Bank acquisition ($4 million attributable loss),” he writes.

In addition, Tan has lowered his AUA growth estimates for FY2022 and FY2023 by 11% and 15% respectively. The lower estimates implies a y-o-y growth of 8% and 15% y-o-y respectively.

He has also lowered his net platform margin estimates to factor in the weak sentiment that will impact net platform margins due to lower trading volumes and higher stocks and exchange-traded funds.

An increase in net platform margins by five basis points will raise Tan’s target price by 30 cents; an increase of 5% in his AUA estimates for FY2022 will lift his target price by 10 cents.

CGS-CIMB’s Andrea Choong agrees that iFast faces near-term headwinds, as she reduced her target price from $9.70 to $7.60. Similar to DBS’ Ling, Choong sees the company enjoying a pick up in earnings from FY2023 onwards, thanks to its Hong Kong ePension contributions. Chong, who has kept her “add” call on the stock, notes that iFast now expects profit before tax contribution from Hong Kong to reach between $18 million and $87 million over FY2023 and FY2025, versus an earlier projection of $21 million and $69 million over FY2024 and FY2025.

“While we factor in the expedited earnings uplift, we nonetheless include in a 20% discount to these contributions as we remain cognisant of execution risks during the operations phase (FY24F onwards),” writes Choong in her April 26 note.