iFAST Corporation - DBS Research 2022-10-27: Dragged By Higher Operating Costs

• iFAST (SGX:AIY)'s 3Q22 net revenue of S$30.07m (- 1.3% y-o-y, +0.7% q-o-q) as global financial markets continued to go through very difficult conditions. See iFAST's earnings announcement dated 26 Oct 2022.
• • Non-recurring net revenue (non-banking operation) was down 38.5% y-o-y, reflecting reduced transactional activities in the midst of very poor global financial market conditions.
  • Recurring net revenue (non-banking operation) was up a healthy 5.9% y-o-y, largely due to higher net interest income. For the 9-month period, recurring revenue accounted for 69.9% of total revenue.
• Operating costs were higher, +19.5% y-o-y for 3Q22, as iFAST prepares for the ePension business which will become operational from 2023, while positioning itself for opportunities arising from a more globalised wealth management and digital banking business model. As a result, net margin declined to 4.0% for 3Q22, vs 13.7% for 3Q21 and 4.7% for 2Q22, excluding impairment charge for the India business.
• iFAST's 3Q22 net profit of S$2.1m accounted for 21% of our full year numbers, below expectations.
• A third interim dividend of S$0.013 was declared for 3Q22, similar to 3Q21. See iFAST's dividend history.
• AUA of S$16.98bn as of 30 September 2022 was down 7.6% y-o-y and 3.9% q-o-q as a result of sharp declines in most equity and bond markets, as well as the group’s decision to exit the onshore platform service business in India. Despite the challenging markets, net inflows of client assets remained healthy in 2022, with positive net inflow of S$599m in 3Q22 and S$1,861m in 9M22 respectively.

Our Thoughts on iFAST's 3Q22

• Costs remain high; temporary pause in operating leverage. 2022 will be a year of higher costs, as iFAST prepares to launch the ePension business in HK while the UK bank is still incurring losses, at least till 2024. The ePension business will be operational from 2023 and would contribute more significantly from 3Q23 onwards.
• In the mid to longer term, iFAST is also positioning itself for opportunities arising from a more globalised wealth management and digital banking business model. iFAST will continue to invest and prepare for its next phase of growth under its four-year plan. And one of the initiatives is to hit AUA of S$100bn by 2028.
• Given the weak 3Q22 results, we have cut FY22F earnings forecast for iFAST by 15% to 32% to account for the higher operating costs. We have also imputed lower AUA growth of -8% y-o-y (previously +5% for FY22F), and 15% growth for FY23F and FY24F, reduced from 20% previously. On the back of the cut in earnings, our DCF-based target price for iFAST is reduced to S$4.00 (previously S$4.08). Maintain HOLD.