(Disclosure: At the time of publishing, the portfolio had a 9% allocation to iFAST.)
What the company does
iFAST is a fintech company that provides investment products and services to financial institutions and consumers. It allows investors to invest in investment instruments such as unit trusts, bonds, stocks, ETFs and insurance products. Services include portfolio management, research, investment seminars, IT solutions and investment administration.
Its main business divisions are
Business-to-Consumer (B2C): FSMOne.com, a multi-product online wealth management platform which serves DIY investors.
Business-to-Business (B2B): an investment platform that serves over 640 financial advisory companies, financial institutions and banks, which in turn have over 12,500 wealth advisors.
Fintech Solutions: IT Fintech solutions for B2B clients.
iFAST Global Bank: iFAST owns a licensed UK bank.
The company’s largest market is Singapore. It also operates in Hong Kong, Malaysia, China and the UK.
Recurring revenue: A sizeable portion of the company’s revenues are recurring in nature. The company charges fees that are dependent on Assets under Administration (AUA, which are investment assets that investors have invested through iFAST). In 2022, 70% of the company’s net revenues were recurring in nature.
Growth Drivers
1. Hong Kong eMPF contract
In 2021, Hong Kong’s PCCW Group won the tender to develop a centralized digital platform for Hong Kong’s Mandatory Provident Fund (which is Hong Kong’s largest retirement scheme).
As part of the tender, iFAST was PCCW’s prime subcontractor for a service category that included MPF scheme operation services, transformation services and user delivery services.
The contract was for a two-year implementation period and a seven-year operation period, with an option to extend for up to three years.
In light of this contract, the company released the following Profit-Before-Tax (PBT) targets:
PBT more than HKD 100m (SGD 17.2m, based on SGD 1 = HKD 5.8) in 2023
PBT more than HKD 250m (SGD 43.1m) in 2024
PBT more than HKD 500m (SGD 86.2m) in 2025
The company stated these targets could change if there were material changes in the operating environment.
This contract would result in a significant bump to iFAST’s financial performance.
2. Increased AUA
As at 30 September 2023, the company’s AUA was $19.1b.
Source: iFAST
The company announced a target to increase AUA to $100 billion (or five-fold from the current level) by 2028.
3. ORSO ePension Contract
In June 2023, the company announced that it had launched ORSO ePension Services, a digital solution for Hong Kong’s Occupational Retirement Schemes Ordinance (ORSO) Person schemes. ORSO is an alternative pension scheme to the MPF.
The digital solution would enable users to perform essential functions pertaining to their pension schemes, including enrolment, termination, contribution and withdrawal via an online platform. Client engagement tools, including fund selector, portfolio chart reporting, and risk profiling would also be made available.
Details are light right now. From speaking to people directly involved, unlike the MPF contract, ORSO contracts are not negotiated with a centralized government body. iFAST has to sign up ORSO trustees and scheme partners to offer ORSO ePension Services to end users.
The company said that it expected the ORSO business to “start making sizeable contribution to Hong Kong’s revenues, profitability and AUA from 1Q2025 onwards.” These contributions will be based on the AUA size of the ORSO schemes, which stood at HKD344b (S$59) as at end March 2023.
4. Global Bank
iFAST’s longer term vision is to build a global bank. The company believes that the future of wealth management is one where many investors from various emerging markets will look for the best wealth management platforms across the world that can provide them seamless access to global products and global exchanges.
According to the company, the private banking industries of Singapore and Hong Kong are good examples of a successful model. Operating from just Singapore or Hong Kong, private banks have been able to tap into customers from around the world. However, private banks only cater to high net worth individuals.
The company believes that a strong opportunity exists for the mass affluent and mass market, where digital capabilities are key enablers.
Management
The team is led by founder and Group CEO Lim Chung Chun. He is the largest individual shareholder of the company with a 13.6% stake (as of 7 March 2023). He has a proven track record of growing the company from its founding in 2000 as a financial portal for unit trusts.
From speaking with people who work with him directly, he has little interest in monetizing his shareholdings. He is satisfied collecting dividends while his shares appreciate in value. We want to see such management-shareholder alignment in our companies. From my experience, such shareholder-friendly disposition is a rarity among the owner-founders of SGX-listed companies.
In an interview with the Business Times in July 2023, Lim gives us some insight into his long term thinking and plans for the company.
“In the next three years, the Hong Kong side will be the bigger growth driver. But in the long run – the next 10 years – I feel that what our iFast Global Bank has opened up for us can lead to something much bigger.”
“In the short term, sometimes quarterly results may not be as nice, but I think we’re clear that once we get past certain quarters where things are not so good, then we will bounce back strongly.”
Financials
(Dollar amounts are in Singapore Dollars)
Source: iFAST financial announcements and own calculations
While the company has not had steady growth every year, it has proven itself capable of growing revenue and profits over a longer period of time. Operating margins, net margins and free cash flow margins have been healthy.
It should be noted that for financial companies like iFAST, free cash flow and net cash on the balance sheet can be distorted by customer deposit inflows / outflows (such as in the 9mo2023 period where cash inflows were high). Overall, the company's net cash position is healthy and debt levels are manageable in relation to its cash position and free cash flow.
Valuation
The two main drivers of growth in the coming years will be the Hong Kong eMPF business and the increase in AUA.
First, the Hong Kong ePension business. By the end of 2025, full contribution should have kicked in. The company should achieve at least $86m (HKD 500m) in profit-before-tax. Assuming a 16.5% tax rate, net profit should come in at least $72m.
Second, the existing base business. This is divided into recurring and non-recurring parts.
Recurring business: The company is targeting $100m in AUA by 2028. That would require a 40% compounded annual growth rate (CAGR) from current AUA. This is an ambitious target. Assuming just a 20% CAGR from now to 2025, AUA would be $27.5b by end 2025.
Over the past 5 years, recurring gross profit as a percentage of AUA has ranged from 0.44% to 0.59%. It is worth nothing that this percentage has been trending down over the years. Assuming this take rate to be 0.4% in 2025, recurring gross profit from AUA is expected to be $110m in 2025.
Non-recurring business: Non-recurring gross profit has historically been 20-30% of total gross profit. Assuming a 20% share in 2025, we get to a non-recurring gross profit of $28m.
In total, using historical profit margins, the sum of the two growth drivers would result in net profit of $107m.
The reader will observe that this is a significant increase to the historical net profit performance of the company.
Lastly, we apply a range of PE multiples (30-50x) to the net margin to derive a share price of $10.4 to $17.3 per share by the end of 2025.
Risks
In terms of the Hong Kong ePension business, I believe the main risk is execution. As this contract does not seem to be dependent on investment market conditions or AUA, revenue will depend on iFAST’s ability to deliver their solution effectively and on schedule.
In terms of AUA growth, I think to grow AUA five-fold between now and 2028 is ambitious. A lot may depend on the company’s ability to sign on Hong Kong ORSO clients, where AUA from those clients will add to iFAST’s AUA pool.
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