iFAST - Hiccup In Major Epension Project
- Delay in key ePension project could be a drag to iFAST's share price – It was reported in the news that the building of the Hong Kong Pension platform was falling behind schedule because of the manpower shortage due to COVID-19. The schedule for the Hong Kong Pension platform commencement will be delayed for 8 months from the original plan. The Hong Kong regulator has stated that, despite the delay, they will continue to target the platform to be fully operational by the initially scheduled timeframe – end-2025.
- Hong Kong’s PCCW Solutions won the contract to design and build the eMPF two years ago and had been scheduled to complete functional testing of the platform’s software system by the end of 2022. But this has now been pushed to mid-2023 while testing for the whole software system is likely to be postponed from the first half of the year to the second half, according to the chairman of the Mandatory Provident Fund Schemes Authority (MPFA). iFAST (SGX:AIY) is the sub-contractor for this project.
- The MPF is Hong Kong’s largest public retirement scheme, with around HK$1.05 trillion (US$134.6 billion) of assets and over 4.5 million members as of December 2022. The digital platform is expected to help slash the scheme’s administration fees by as much as 55%.
iFAST maintained guidance as the group has already provided buffer for delay.
- iFAST’s initial guidance for its Hong Kong business (including the ePension platform) in the 3Q2022 & 9M2022 Results Presentation announcement was based on the expectation that operations of the ePension division will commence in 4Q2023 and has provided for a certain period of delay in the rollout of the ePension project. Based on the various available information now, iFAST continues to expect to see contributions from the ePension division to commence in 4Q2023 as per the initial guidance.
- To recap, iFAST has guided for the PBT Targets of the overall Hong Kong business :
- Target to achieve PBT of >HKD100 million in 2023 (assumes that the contribution from ePension project will begin in 4Q2023).
- Target to achieve PBT of >HKD250 million in 2024.
- Target to achieve PBT of >HKD500 million in 2025.
- However, we believe that given the delay of 8 months, there could be some negative impact on the bottom line. The delay could lead to higher operating costs and push back in revenue recognition. As of 3Q22, iFAST's operating costs had already increased 19.5% y-o-y, and with this delay, we can expect a further increase.
Cut FY23F and FY24F earnings forecast for iFAST by 3%-26%.
- We have removed the contribution from the ePension project in 2023 and assumed higher operating costs in FY23F and FY24F as a result of the eight-month delay in the project. We have previously included this project as per the official guidance from the management. Pretax margin on gross revenue for the overall group is reduced to 10.2% and 18.5% in FY23F and FY24F respectively, from 13.4% and 19.1% previously. No change in our projection of 15% y-o-y growth in Assets Under Administration (AUA) of iFAST for FY23F and FY24F as the ePension project is not included in the AUA computation. Overall, FY23F and FY24F earnings forecast for iFAST were reduced by 26% and 3% respectively.
- iFAST's share price has rebounded from a low of about S$3.60 in end October to about S$6 in mid-December 2022 (+67%), possibly due to optimism that market sentiment can improve going forward. iFAST’s financial performance is typically tied to market sentiment. With the delay in this key project, we could expect some share price weakness in the near term.
- Our target price for iFAST is reduced slightly to S$3.98 (S$4 previously) based on the DCF valuation method. With the recent surge in iFAST's share price above our target price, coupled with this latest negative development, we downgrade iFAST to FULLY VALUED.
- We would prefer to re-visit this stock again when we have more clarity on the development of the ePension project.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Lee Keng LING DBS Group Research | https://www.dbs.com/insightsdirect/ 2023-01-16 2023-01-16
Previous report by DBS:
2022-10-27 iFAST Corporation - Dragged By Higher Operating Costs.