iFAST Corporation Ltd ("iFAST" or the "Company") is offering 32.8m new shares at $0.95 each of which 2.8m is for the public and the rest via placement. The IPO will close on 9 Dec 2014 at 12pm and starts trading on 11 Dec 2014. There will be an over-allotment option for 3.28m shares as well. Separate from the offering, there will be a 19m tranche for Cornerstone investors. The market cap will be around ~S$243.4m
iFAST is an internet-based investment products distribution and administration platform with AUA of ~S$5.13 billion as of end Sep 2014. It is headquartered in Singapore is present in Hong Kong, Malaysia and China. It has two primary portals which you may be more familiar with:
- Fundsupermart.com. As the name suggest, this is the place you can buy and sell funds at 1% (if i recall correctly). It was one of the game changers in the fund management industry where the bid-ask spreads for unit trusts used to be at least 4 to 5 cents. Consumers who invest in Unit Trust would have benefited from their presence. This is a B2C business model.
- iFAST Financial. This is a portal catered to the specialised needs of financial advisory companies and institutions. It currently has over 150 FA companies and FIs and more than 5000 FA representatives using its B2B platform. It has a 19.9% stake in an independent FA firm called Providend.
If you distill it even further, it is simply a platform or gateway between products providers (fund managers) and the end consumers (investors). The picture below should be able to tell you what i mean. The only thing is you don't know how much such gateways are there in the market and according to the prospectus there is intense competition. :-P
If you can read the picture above, you will see what IPO "story" they are trying to tell you. The key phrase is probably establishment of China operations in 2014.
I have to tell you that i was pleasantly surprised to receive an invitation from iFAST (cold email below) to attend their IPO briefing. This means that my blog is also gaining traction in the local IPO market as well, maybe i can sell my web address and retire soon... or maybe they want me to be kind in my analysis :-P
Anyway i have to say the summaries in the prospectus are easily understood that i can just copy and paste. Save me a lot of time. The investment thesis are below and why they think you should invest in them.
The 2 key messages you should look out for are "scalable business model" given it is an internet platform and "recurring revenue" which is driven by the Assets under Administration. This accounted for 81.6% of the net revenue since FY2011.
This is an easy to understand business where revenue is "sticky". I am not a user for their platforms so i can't comment on its user friendliness but it seems like once you use the services to buy and sell funds, you are unlikely to change the service provider. A competitor will be the POEMS platform by Philips Securities.
Being an internet platform which is 24/7, once you reach certain critical mass, the infrastructure costs largely remained constant and any new investors acquisition will add to the top and bottom line.
In this regard, i like the predictability of the revenue. However, they didn't give the same predictability on their dividend policy. As such i am not sure if the 60% net profit after tax as dividends will continue beyond FY2015. As it is, the Company intends to distribute 60% of its Q4 profits and FY2015 profits as dividends. It will be interesting to find out if they will distribute on a quarterly basis.
The 9M2014 profit from operations continue to show good growth momentum by growing more than 40% compared to the same period last year to ~$7.6m. My own forecast is the net profit will range between $10.1m (9M14 divide by 3 x 4) to 11.5m (FY2013 x 1.40). For the purpose of my computation, i will assume profit grow 30% to $10.7m. That will translate into a post IPO EPS of 4.18 cents, implying a PER of around 22.7x.
Assuming EPS continue to grow by 30% in FY2015 (i am guessing), the EPS will be around Singapore 5.43 cents. That translate into a forward PER of 17.5x and a dividend yield of 3.4% based on 60% payout. The adjusted NAV per share is around 24.75 cents.
A China Growth Story?
You can see from the chart above that Singapore continues to be a dominant market place with 75.5% of the AUA. The Company mentioned that it established operations in China this year. It will be an interesting strategy if they can execute well in China as that is where the potential future growth will come from.
The Company will raise at least S$49.2m from the IPO proceeds and the bulk of it will be used to expand into China ($7m) and for Mergers and Acquisitions ($27.2m). It seems like they already have some targets in mind given the M&A budget forms 55% of the proceeds raised.
The key shareholders are Lim Chung Chun (18.33%) and Lim Wee Kian (7.35%). They also have interesting shareholders like Singapore Press Holdings (15.88%) and Fidelity who subscribed for the cornerstone shares together with a GIP fund under OWW Capital. While the cornerstone are not subject to any lock up, the rest of the shareholders (~61.55%) will be under moratorium for 6 months.
One thing to note is that DMG divested its entire shareholding at $0.83 per share in Nov 2014 before the IPO.
What i like about the Company
- High recurring income nature and scalability of the business
- The "promise" of China as a growth catalyst as more China investors become affluent and educated and prefers the DIY style of investing in funds.
- Simple to understand business model
- The company is profitable and paying dividends.
- Good cornerstone investors coming in to subscribe at IPO price
Some of my concerns
- The IPO valuation is rich and fully priced in for growth in the near term
- Execution of the China strategy is still an unknown
- 13,224,996 options issued at various exercise prices at 60c or lower represents a dilution to IPO investors who subscribe at 95c
- While the low number of shares allow them to do the placement well, it also means that it is highly priced literally at 95c. I am not sure if the local retail investors will be able to appreciate that. High valuation and high price.
Please note that I have an immaterial 7 lots from the placement tranche.
I am actually quite mixed in feelings with regards to the ratings I am going to give. On one hand, I like the simple business model, dividend paying mentality and the idea of expanding into China. On the other hand, the Company is priced richly to internet companies and the valuation is probably richer than Apple. However, a rich valuation is a powerful currency to do M&A and that will help accelerate the growth of the Company.
In this regard, I have to give it a 1 Chilli rating. Buy only if you are comfortable with the long term prospects of this business model and the expansion into China. However, don't expect a price pop on the first day. It will probably take a while for the market to find a price equilibrium.