2023-06-30 14:32:59 ET
Summary
- TOP Financial Group shares soared following the release of financial results for the fiscal year ended March 31, 2023.
- TOP stock has likely come under renewed scrutiny from meme stock investors, as it did during the last April 27-28 surge.
- Financial results for the fiscal year ended March 31, 2023, weren't great, and in the absence of a clear business expansion strategy, the stock price is most likely overvalued.
- TOP Financial stock deserves to be treated with extreme caution as it carries a high degree of risk.
Shares of TOP Financial Group Are Soaring Following the Results for the Fiscal Year Ended March 31, 2023
During regular hours on Friday, June 30, shares of TOP Financial Group Limited (TOP), a Hong Kong-based online broker, are up 21% at $9.62 each following the release of financial results for the fiscal year ended March 31, 2023.
As a result of this strong upside of share price, the stock in TOP Financial now has a market cap of $273.99 million and a 52-week range of $3.50 to $256.44.
A previous article assigned this stock a Hold rating for investors who bought shares after an impressive April 27-28 rally on unusual trading activity. The rating was based on the idea that after the amazing rise in the share price, it could have been easier for the company to raise capital, which would have accelerated the company's business expansion plan.
If TOP Financial wants to expand its customer base from a few wealthy individuals to a broader base, including smaller individual customers who charge higher commission rates, the company will need to invest heavily in effective promotional campaigns to reach potential customers for its platform and product services.
But as the 81% year-over-year increase in communications and technology expenses to $0.78 million for the year ended March 31, 2023, was driven by, as the company states, “a one-time incidental expense based on a special request from a customer”, this raises doubts that the company is really pursuing a business expansion strategy based on strong and targeted advertising campaigns.
As such, it's better not to get too excited about an increase in the stock price, at least until there are clear signs of a company's business expansion project. So the best thing to do here is to be very careful and treat these sharp increases in the stock price as you would with a meme stock, since TOP Financial actually seems worthy of such a label.
A meme stock is a viral stock because, just like a photo or story that goes viral on social media in minutes, this type of stock has the ability to monopolize people's attention online. Hence, a strong societal sentiment is building around the meme stock, which if it becomes sovereign, is fundamental to continue to grab people's attention online. Intense online activity with discussions and analysis of meme stocks on social media and blogs creates and fosters social sentiment, as these technologies have the amazing ability to evoke cybernauts' emotions. Therefore, many investors, persuaded by the information on these platforms, choose to trade these stocks.
The takeaway from this vision is that TOP Financial is expected to fall back to significantly lower levels when this rally comes to an end, similar to what happened after the previous surge on April 27-28. Therefore, this analysis reinforces the "Hold" rating in the sense of giving up this security as long as it only appears as a vehicle for speculative activity and therefore represents a very high risk for retail investors. With meme stocks, where the share price suddenly skyrockets, there is a significantly high risk that the stock's market value is largely disconnected from the company's fundamentals.
How TOP Financial Group has Performed in the Fiscal Year That Ended on March 31, 2023
First of all, the shares of the Hong Kong-based online broker went public on Wednesday, June 1, 2022, through a $25 million IPO under Zhong Yang Financial Group and then changed its name to TOP Financial Group Limited in July 2022.
Zhong Yang - the founder of TOP Financial Group - offered a total of 5 million shares of common stock and asked a price of $5 for each of them.
TOP Financial specializes in trading local and foreign stocks in addition to futures and options products, but the bulk of its revenue comes from commissions on futures contracts.
The company reports financial results for the entire fiscal year ending on March 30, and for the first six months of operations ending on Sept. 30.
For the fiscal year ended March 31, 2023, TOP said that revenue was $9.7 million, up 24.4% year-on-year, mainly due to an increase in fees for Trading Solutions Services, which were up 33% to nearly $4.4 million, or 45.3% of total revenue.
Trading gains of approximately $0.194 million (vs. a loss of ? $0.794 million in prior fiscal year) and interest income of approximately $0.5 million (vs. $3.535k in prior fiscal year) were also major contributors to revenue as they together accounted for a total increase in revenue of nearly $1.9 million.
The remainder of the total turnover consisted of commissions paid for the brokerage of futures. These totaled $4.312 million, or 44.6% of total sales, and were up 0.6% year over year.
Total expenses were $6.3 million (up 47.8% year over year), and most of which -- say, nearly 30% -- related to fees the company paid to brokerage partners because TOP needs to use these partners to place orders for its clients.
A significant portion of say ? 23% of total expenses was incurred for non-executive director fees and employee benefits, and to pay professional networks for the acquisition of high-net-worth individuals, which is not done solely through shareholders’ social networks.
TOP's net income was $3.4 million, or 2.86% down year-on-year. Thus, TOP achieved a net income margin of 35% for the fiscal year ended March 31, 2023, compared to a net income margin of 44.9% for the fiscal year ended March 31, 2022.
The Financial Condition of TOP
As of March 31, 2023, TOP's balance sheet showed $17.85 million in cash, cash equivalents and restricted cash. That cash came primarily from the $25 million in net proceeds from the IPO. Operating activities caused a cash outflow of $6 million in the fiscal year ended March 31, 2023.
Payables to customers of $3.5 million stood out among total liabilities of $4.33 million as of March 31, 2023.
Essentially payables to customers item include the cash deposits received by TOP from its clients needed to cover the position taken by the clients for the trading activities, as the third-party brokers/dealers require to do so. The item also includes liabilities from pending transactions and overnight clearing houses, as well as bank balances that TOP holds for customers.
Total debt consisted of total operating lease liabilities of $150,139 (or $150.139k).
Conclusion
TOP Financial Group shares soared following the release of financial results for the fiscal year ended March 31, 2023. This stock has likely seen renewed enthusiasm from meme stock investors, as it did during the last April 27-28 surge.
Financial results for the fiscal year ended March 31, 2023, weren't great considering margins are declining as well as cash holdings while the core business is experiencing significant cash outflows.
Given that performance and in the absence of a clear business expansion strategy, the stock price is most likely overvalued.
This stock deserves to be treated with extreme caution, as it carries a high degree of risk that is inappropriate at a time when central banks continue to signal a highly uncertain future.
For further details see:
Why TOP Financial Stock Is Gaining After Reporting Fiscal Year 2023 Results