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Broker's take: CGS-CIMB downgrades 'too fast, too furious' fintech iFast to 'hold'

CGS-CIMB has downgraded Singapore-based wealth management and brokerage platform iFast Corp to "hold" from "add", although it increased the target price to S$2.44, from S$1.85 previously.

The mainboard-listed company was trading at S$2.34 as at the midday break on Monday, down S$0.03 or 1.3 per cent.

Market exuberance appeared to have "substantially" priced in iFast's prospects of winning the bid for Hong Kong's digital pension system as well as for a digital banking licence in Singapore, CGS-CIMB said, while describing the counter as "too fast, too furious".

It was trading at 35 times its FY21 forecast price-to-earnings ratio, analyst Andrea Choong wrote in a research note dated Friday.

Based on Friday's closing price of S$2.37, the stock has surged more than 23 per cent since early August, when Bloomberg reported that iFast was part of one of the shortlisted consortium finalists to digitise and centralise Hong Kong's pension system named e-MPF.

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The consortium that includes iFast is led by telecommunications provider PCCW, and is vying with Ping An Insurance's OneConnect for the project.

The appointed e-MPF operator will receive fees based on the Mandatory Provident Fund's asset pool. Bids are at about 20-35 basis points (bps) in fees, or about HK$2 billion to S$3.4 billion (S$353 million to S$600 million) in revenue per year for the winner, according to Bloomberg's report.

CGS-CIMB believes iFast might hold a 10-30 per cent stake in the consortium, although shareholding details have not been disclosed. Therefore, using a mid-range point of about 28 bps in fees, a successful bid could add some S$4-11 million in yearly net profit to iFast and increase its earnings per share by one to four Singapore cents, Ms Choong wrote.

She said that the fintech player's role in PCCW's e-MPF consortium will likely be akin to iFast's operations as an investment administrator with the Central Provident Fund in Singapore.

Meanwhile, iFast is also leading a consortium comprising China's Yillion Group and Hande Group for a wholesale digital bank licence in Singapore. If awarded the licence, iFast will own a 65 per cent stake in the entity.

The outcomes of both its bids in Hong Kong and Singapore are expected to be announced by the end of this year.

"iFast's collaborations with top-tier digital players in bidding for high-profile government contracts and licences entrench its franchise value in the region," the analyst wrote.

Despite the rating downgrade, CGS-CIMB upped its target price, based on sum of the parts, to factor in incrementally higher stockbroking revenue from sustained trading volumes, the scaling up of iFast's Malaysia operations, and reduced operating expenses over FY20-21 thanks to the Singapore government's extended Jobs Support Scheme.

CGS-CIMB increased its estimates for iFast's earnings per share by 27 per cent for FY20, by 29 per cent for FY21, and by 35 per cent for FY22.

Earlier this month, iFast received approval-in-principle from the Securities Commission Malaysia to commence stockbroking operations in early 2021 in the country, which will add to its existing stockbroking businesses in Singapore and Hong Kong.

CGS-CIMB noted that stockbroking has not traditionally been a key growth driver for iFast, given the lower margins of about 8 bps per trade as well as the stiff competition with ultra-low or zero fees in the space.

The Malaysia stockbroking operations will likely require an operational ramp-up period of about six to nine months before there will be meaningful earnings contribution, Ms Choong said.

However, elevated trading volumes across the region, due to extended work-from-home initiatives, should offset this, she added.

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