Brokers' take: DBS lowers iFast target price to S$11.37 on UK bank acquisition

DBS Group Research has lowered its target price for iFast Corporation to S$11.37, from S$12.93, after the wealth management platform announced a proposal to acquire an 85 per cent stake in a UK bank, BFC Bank.

This is because while having a digital bank would help iFast create a global seamless fintech ecosystem, some startup losses and integration costs arising from the move are expected in 2022 and 2023, its analyst Ling Lee Keng said in a report on Monday (Jan 10).

This comes as the whole integration process is expected to take about 12 to 18 months, with the group targeting to achieve profitability for BFC Bank only in 3 years' time, likely in 2025.

The brokerage, however, maintained "buy" on iFast, given its strong growth momentum ahead, propelled by an expected leapfrogging of its Hong Kong business from 2024 onwards.

Ling added that there is more room for its assets under administration (AUA) to grow, pointing out that it is "well poised" to capture more market share in Singapore, its key market. She noted that its market share here is just 10 per cent of the estimated S$128 billion in assets under management of the collective investment schemes.

When announcing the proposed acquisition of BFC Bank on Jan 7, iFast, which had about S$36 million cash as at end-September last year, revealed that it is looking at a total investment sum of £40 million (S$73.4 million).

Pointing out that £22.6 million will be used to fund the acquisition, while £2.4 million will be used to offset relevant transaction costs, Ling said the combined £25 million represents a price-to-book multiple of about 1.62 times, which is "not cheap".

She noted that Singapore banks trade at around 1 time the price-to-book value, while Hong Kong and China banks generally trade below 1 time price-to-book value.

However, Ling accepted that a "decent bank located in a trusted jurisdiction" might not be readily available to iFast, which is currently not part of the bank ecosystem as it had failed to clinch bank licences in Hong Kong and Singapore.

DBS's new target price for iFast was based on the discounted cash flow valuation method to capture growth in its steadily growing cash flow.

Ling said the brokerage cut the projection for iFast's earnings for FY2022 and FY2023 by 21 per cent and 11 per cent respectively, with higher integration costs and startup losses expected in FY2022. This is calculated with the assumption that the acquisition completes by the middle of this year with a 50:50 cash and debt funding.

Still, she expects the group to experience robust growth of 51 per cent in FY2021, 3 per cent in FY2022 and 45 per cent in FY2023, helped by contributions from the ePension division in Hong Kong.

"We are more optimistic on iFast given its scalable business model and drive towards digitalisation to propel the group to greater heights," she added.

Jefferies also moved to lower its target price for iFast on Sunday, cutting it from S$8.65 to S$8, while giving the stock a "hold" rating.

Its analyst Krishna Guha said the brokerage revised its FY2022 and FY2023 net income estimates by 4 per cent and 10 per cent respectively based on the assumption of higher operating expenses with BFC Bank's acquisition.

"The next couple of years will be an investment phase with a higher opex/capex run rate. Given the history of BFC Bank, there are also lingering regulatory concerns and whether these have been completely dealt with," Guha said.

He added that there is also a concern if the deal and the resulting diversification to UK and the Middle East was necessitated by a slowdown in AUA growth, change in regulatory regime in China and increasing competition in Singapore.

"Any capital raising, even if small, may be an overhang on the share price," he added.

Shares of iFast closed at S$7.85, down 3.9 per cent or S$0.32, on Friday, after the announcement. Trading of the counter was halted on Monday morning pending another announcement.

READ MORE:

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• iFast eyes growth in Hong Kong, targets more licences in bid to scale abroad