I don’t know to laugh. Or to cry.
iFast Holdings soared 855% in just 1.5 years. Then lost 60% of its gains over the last 11 months.
I’ve no better way to sugar-coat this: iFast Holdings 2Q2022 results is horrible. But that’s not the reason why its stock is currently in the dump.
Does this mean iFast Holdings has no hope?
Was I wrong the last time I wrote about iFast?
Let’s explore what happened.
Why iFast had a bad 2Q2022 result
There were two reasons.
First, the UK digital bank, BFC Bank (now called iFast Global Bank) iFast bought, struggled. Even though this digital bank contributed 7% of iFast’s 2Q022 revenues, it’s still a S$950,000 loss during 2Q2022.
As far as I’m concerned, many acquired companies tend to struggle.
- DBS bought Dao Heng Bank, which subsequently had a big write down.
- SingTel also had problems with Bharti Airtel the past few years.
- Kraft Heinz took a US$3 billion write off with nine brands in 2020.
Not all acquisitions work out. There could be an exodus of talent, culture mismatch, “acquisitive synergy” doesn’t exist and so on. In fact, most acquisitions struggle.
Now, what’s important is iFast hasn’t overstretched its finances from buying the digital bank.
In its latest financial quarter, iFast carries no debt. And has S$165 million of cash.
Even if iFast has to write off its UK digital bank acquisition, it wouldn’t hurt it.
At least, I’m not counting on iFast to be in trouble.
Next, iFast has also decided to pull out from India — regulatory problems. The Securities and Exchange Board of India had stopped investors using “pool accounts” to trade mutual fund.
You see, Pool accounts are digital wallets investors can store money in, which India regulators decided to stop investors from using. This will affect how iFast, a Fintech company, runs their business in India.
As a result, both bad news led to a higher operating costs for the quarter.
Was I wrong about IFast?
I wouldn’t focus on one bad quarter.
What the market doesn’t know is iFast secret ingredient isn’t what everyone thought it be. iFast isn’t a traditional stock broker — it doesn’t make money off from stock trading commissions. iFast is more than that.
A big part of their business is actually recurring income it collects from trailer fees. In fact, close to half of its revenues come from trailer fees.
What’s trailer fees? Fund managers pay trailer fees to iFast for selling fund managers’ products — mainly unit trusts — on iFast’s online platform. As long customers continue to own unit trusts, iFast continues to collect the fees year after year.
It’s a capital-efficient business. Once the online platform is up and running, you don’t need that much capital to maintain the business.
This makes iFast more than just a broker. In my opinion, iFast doesn’t compete with other stock brokers, including the newer ones.
And many people don’t get this. Unit trusts are “sticky”. Unlike stocks, unit trusts don’t get traded often. And the funny thing is, people who buys unit trusts tend to keep it for the long term, even during a stock market crash. This is opposite of stocks — where people tend to buy and sell quickly.
That’s why surprisingly, iFast’s AUA doesn’t drop as much despite the stock market crashed earlier this year.
You don’t see people withdrawing their money from iFast.
Recurring income is powerful. Because it gives iFast “cash flow visibility”. It doesn’t rely on investors’ money. It doesn’t borrow debt.
What impressed me the most is iFast “network-like effect”. Think of it like a snowball rolling down the hill.
As more people use iFast, the company’s assets grows, the more fees it collects. And as more people see iFast’s assets grow, more people trusts iFast. And the platform attracts even more money.
It’s a hallmark of an appealing business.
Why IFast shares plunged?
The real problem isn’t iFast lousy results. The market sees iFast is a tech stock.
Since earlier this year, the NASDAQ has fallen the most, down 24% year to date. And wiping out most of the gains of tech stocks in general.
The reason is simple.
Tech stocks are susceptible to interest rate hikes. Many tech companies don’t produce profits. In fact, these companies have been raising tons of debt. And interest rates could put mounting pressure on these companies.
As a result, the stock market became scared.
And decided to throw all tech stocks out of the window.
In fact, Fed came out to say it will continue to raise interest rates
But like I said, i Fast is different. In its latest quarter, it still maintained a strong AUA, produced solid revenues and profitas. What’s more, it doesn’t have any debt at all.
iFast shares plunged.
But its business is still one of the more profitable Singapore companies. It doesn’t compete with other stock brokers, there’s no debt and and utilizes one of the most powerful business model — recurring income.
iFast’s higher operating costs from its digital bank and its pulling out of India is more a temporary issue than a permanent one.
Willie Keng, CFA
Founder, Dividend Titan