+ Average AUA growth led by strong net sales. Average group AUA in 3Q17 grew 19.2% YoY to S$6.92bn and 1.6% higher QoQ. Net sales contributed S$230mn but AUA revaluation had a negative S$120mn impact (See Fig 7). However it is unclear what had caused the negative revaluation. Singapore’s AUA (largest by geography) grew 14.3% YoY. Hong Kong’s AUA (2nd largest by geography) grew 25.4% YoY after an extended period of weak performance. Malaysia’s AUA grew 46.4% YoY. The composition of bonds, ETFs and stocks grew to 7.4% of group AUA in 3Q17 (2Q17: 7.2%).
+ Higher revenue owing to broader product mix and customer volume. Revenue in Singapore grew 24.1% YoY in 3Q17 contributed by net subscriptions into unit trusts, bonds, ETF and stocks and robo-advisory portfolios. Revenue in Malaysia grew 38.6% YoY in 3Q17 as there was significant growth in UT business. Revenue in Hong Kong grew 26.1% YoY in 3Q17 as the B2B and B2C business witnessed strong net inflows of investments.
+ 9M17 total net revenue / AUA grew 12bps QoQ to 0.731%. Recurring net revenue / AUA increased to 0.606% in 9M17, higher than 0.602% in 1H17 as bonds and unit trusts inflows gain traction especially in Hong Kong. Stronger commission income came from increased investment subscription from customers and IT solution fees from FA firms and institutional clients in 3Q17. As a result non-recurring net revenue as a percentage of AUA increased to 0.125% in 9M17 higher than 0.117% during 1H17 and 0.105% in FY16.
+ Positive 0.9% jaws ratio in 3Q17 compared to 3Q16. Staff costs to net revenue is lower in 3Q17 at 41.8% compared to 44.5% in 3Q16 offset by higher other operating expenses to net revenue in 3Q17 at 34.4% compared to 33.5% in 3Q16. Other operating expenses increased 25.4% YoY in 3Q17 due to higher rental in China following the opening of the new Shanghai office in 3Q16, higher rental in Singapore from the additional office space in Singapore effective July 2017 and increase in IT services and maintenance, bank charges and brokerage costs.
– China continue to be loss-making but losses have narrowed. Loss for iFAST’s Chinese operations in 3Q17 was S$1.025mn, lower than S$1.064mn in 3Q16.
We see continued strength in AUA growth through net sales as investors’ risk appetite is supported by improving economic sentiments and better clarity in geopolitics. As we have observed in 2016, iFAST’s performance had been more affected by macro uncertainty than by ephemeral market volatility. As long as investors are increasing their allocation into investment products instead of staying on the side, we could expect sequential improvement in its operations.
iFAST has been strengthening its partnership with FAs though minority stakes in FA firms. These partnerships improve iFAST’s B2B sales funnel and develop new sales verticals such as the provision of IT solutions to the FA firms and institutional clients. The provision of IT solutions helped increase 3Q17 non-recurring net revenue by 54.7% YoY. 3Q17 minority stake investments are RAF Holdings Pte Ltd, a FA firm in Singapore and Beijing Financial Alliance Technology Co Ltd, an FA consultancy and advisory firm in China.
Gordon Growth Model
Valuation: 1-year average Price to Earnings Ratio of 35.3
Maintain “Accumulate” rating with unchanged target price of S$1.11, based on Gordon Growth Model as we roll over to FY18e valuations. Previously, target price was pegged at 34.3x PE ratio based on FY17e EPS of 3.25 cents. We have changed our valuation method to Gordon Growth Model because iFAST does not have debt so its ROE is a strong indication of how efficient its shareholder equity is deployed.