iFast misses estimates in 4QFY2022, higher profit teased for FY2023

CGS-CIMB Research downgrades iFast to “reduce” from “hold”, with a lower target price of $3.50.

iFast Corporation’s AIY results for 4QFY2022 ended December missed analyst estimates, with earnings of $1.30 million down 82.0% y-o-y and total revenue of $48.5 million down 11.3% y-o-y.

In turn, this brought total FY2022 earnings down 79.0% y-o-y to $6.42 billion and revenue down 5.0% y-o-y to $205.31 billion.

iFast’s earnings were below UOB Kay Hian’s (UOBKH) expectations, owing to investment costs and impairment loss incurred. “Patmi also fell… and formed 92% of our full-year forecasts, slightly below our expectations,” writes UOBKH analyst Heidi Mo.

Assets under administration (AUA) continued to fall to $17.4 billion, down 8.3% y-o-y and up 2.6% q-o-q, as market sentiment remains weak in global financial markets, Mo adds.

iFast’s FY2022 results were dragged down by investments made during a “tumultuous year”, says Mo in a Feb 16 note, with its Hong Kong ePension (eMPF) division preparations and a $5.2 million impairment loss associated with iFast’s exit from the India onshore platform service business following regulatory changes by the Securities and Exchange Board of India.

Excluding the impairment loss, FY2022 patmi would have been $11.6 million, down 62.1% y-o-y.

Management expects profitability to rise in 2023, with higher revenue growth contributed by its Hong Kong eMPF project.

As a result, Mo maintains “hold” on iFast with a higher target price of $5.06 from $3.62 previously. This represents a downside of some 8.5% from a traded price of $5.53.

CGS-CIMB downgrates iFast

On Jan 14, iFast’s management announced an eight-month delay in the project timeline of the eMPF project, attributing it to manpower shortage. Despite the delay, the platform remains slated to be fully operational per the initial scheduled timeframe of end-2025, as management had factored a six-month delay on project implementation.

The group expects to see contributions from the division in 4QFY2023, but CGS-CIMB Research analyst Andrea Choong disagrees.

“We think that FY2024 could be a more realistic timeline to factor in significant earnings contribution from the project given tight labour market conditions in Hong Kong. As we understand that these service fees are milestone-based, we build in a 40%-50% discount to these contributions pending visibility on achieving these goals,” writes Choong in a Feb 16 note.

Choong adds that a component of this project is related to ORSO (Occupational Retirement Scheme), where fees are dependent on AUA, which will be subject to market volatility.

As a result, Choong downgrades iFast to “reduce” from “hold”, with a lower target price of $3.50 from $3.80 previously. “Stronger-than-expected securities trading volumes on the back of heightened market volatility is an upside risk. Difficulties due to the labour shortage and other implementation issues resulting in a further delayed commencement of the eMPF project is a de-rating catalyst.”

While iFast’s FY2022 patmi came in at 92% of UOBKH’s full-year forecast, it formed a lower 91% of CGS-CIMB’s estimates.

iFast proposed a final dividend of 1.40 cents per ordinary share for FY2022, unchanged from the final dividend of FY2021. This brings the full-year dividend to 4.80 cents, representing a 120.9% payout ratio.

Higher dividends will likely be a prospect only from FY2024, says Choong, when iFast’s new initiatives ramp up. “iFast’s platform business in Singapore will likely remain its earnings anchor. Although there are new initiatives being launched, its digital bank could still incur start-up losses in FY2023.”

‘Little scope for earnings upgrade’: Citi

Following iFast’s acquisition of the UK-based BFC Bank in March 2022, the Group has discontinued wholesale currency services, which drove sharply lower revenue in banking operations.

The banking operations will now focus on a Digital Transaction Banking unit, which was launched in December 2022 to service UK corporate customers in the payment industry and a Digital Personal Banking unit, which will provide customers with a basic bank account.

Management continues to target breakeven in FY2024 although CEO Lim Chung Chun notes FY2023 losses may be comparable to FY2022, as the Group continues to invest in the business.

With CGS-CIMB’s downgrade and target price cut, Citi Research is no longer the biggest bear on iFast’s share performance. Citi analysts Tan Yong Hong and Tian Yafei maintain “sell” on iFast with a target price of $3.80 and a “high risk” warning.

“We see little scope for earnings upgrade with FY2023 earnings expectations at $29 million, implying $34 million net profits excluding global banking operations or core business profits at $24 million based on management guidance on ePension contribution,” write Tan and Tian in a Feb 16 note.

Based on management’s projections, the Hong Kong project will contribute $13 million/$36 million/$76 million to profit before tax in FY2023/2024/2025.

Looking ahead, management expects to use the cash generated from the eMPF project to support capital requirements for the banking operations and supporting dividend payout ratio of 30%.

As at 1.02pm, shares in iFast are trading 28 cents lower, or 50.6% down, at $5.25.

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