Citi Research sees further downside risks to iFast’s upcoming 2QFY2022 results, as shares in the digital wealth management platform have halved in price year-to-date.
iFast will report its 2QFY2022 results on July 23.
In a July 19 note, analysts Tan Yong Hong and Tian Yafei reiterate “sell” on iFast with a lower target price of $3.80 from $4.20 previously, extending Citi’s slashing of iFast’s fair value from $7.50 last October. The latest target price represents an 8% downside.
They add: “We continue to be a seller of iFast given: rising competition in the online brokerage [space] leading to pressure on platform margins and slowing assets under administration (AUA) growth momentum; near-term earnings uncertainty after acquiring the loss-making BFC Bank [in the UK]; and further mergers and acquisitions (M&A), in particular, funded via the equity market and its associated execution risks.”
“While we are fundamentally positive on the wealth management outlook and iFast’s business model as a fintech disruptor, we think share prices are fully valued,” write Tan and Tian.
Tan and Tian cite three reasons for their “sell” call: iFast’s AUA is likely to shrink in 2QFY2022, its net platform margins will likely do the same and iFast could see an earnings downgrade.
AUA is likely to decline, write Tan and Tian, pointing to two signposts. Charles Schwab’s 2QFY2022 clients assets are down 13% q-o-q, and this has a 98% correlation with iFast’s AUA.
In addition, the MSCI APAC index is down 12% q-o-q, and this has a 93%$ correlation with iFast’s AUA market impact.
Tan and Tian also point to “soft net platform margins”. “Net platform margins have directionally tracked the Singapore B2C mobile application downloads. The mobile application downloads count declined 18% q-o-q to 2,333, which could suggest persisting pressure on margins in 2QFY2022, especially with rising competition from online brokers that are offering zero trading commissions.”
See also: iFast's lack of near-term catalyst spurs downgrades, better prospects seen from Hong Kong
Finally, iFast could face possible earnings downgrades, say Tan and Tian. “Based on Bloomberg, consensus is forecasting $28.1 million earnings for FY2022, implying $22.4 million for 9M2022F. Based on iFast’s guidance on BFC Bank’s $4 million loss contribution, this implies $26.4 million, or $8.8 million per quarter for 9MFY2022 (up 53% compared to 1QFY2022).”
They add: “We flag possible earnings downgrades post-2QFY2022 results on downside risks to AUA and platform margins.”
Cut FY2022-24 earnings estimates
In their report, Tan and Tian have reduced their AUA estimates by 5%-7% for the FY2022-FY2024, in addition to lowering their net platform margin estimates to 56 basis points (bps) from 60 bps in FY2022. iFast’s margins for the 1QFY2022 stood at 57 bps.
As such, the analysts have also cut iFast’s FY2022-FY2024 earnings estimates by 9%-12%, factoring in a soft AUA growth and net platform margins. “After our earnings revisions, our FY2022/FY2023 earnings are 18% and 31% [respectively] behind consensus,” write the analysts.
Earnings growth is less sensitive to AUA growth due to declining net platform margins as stocks and ETFs AUA is growing at a faster pace, they add.
Consensus FY2023 earnings estimate imply 41% y-o-y growth, possibly factoring in earnings contribution from iFast’s Hong Kong eMPF pension platform project, write Tan and Tian. “Assuming earnings for Hong Kong operations remain flat in FY2023, this suggests consensus is forecasting FY2023F earnings at $31.3 million or 13% ahead of our estimates.”
Citi values iFast’s core businesses at $2.70, implying 30x FY2023 P/E.
As at 10.01am, shares in iFast are trading 2 cents higher, or 0.48% up, at $4.14.
