A Big Fish in a Big Pond
Shares of financial services provider IOOF Holding’s (ASX:IFL) popped 5.4% in trading last week, following the release of a strong trading update. The company maintained broad earnings guidance and advised that the acquisition of ANZ’s pension and investment business was progressing well. We have regularly maintained that the deal was a good one for both parties.
To recap and as discussed in prior coverage we believe that the acquisition of ANZ’s Pensions and Investments (ANZ P&I) business and ANZ’s Aligned Dealer Groups (ADGs) is a transformative deal for IOOF, with a palatable price given the expected cost synergies. We agree with management that strategically the ANZ Wealth Management business will be complimentary for IOOF Holdings.
Source: IOOF Holdings (ASX:IFL)
We are encouraged by the company’s strong track record of integrating acquisitions, and pro-forma gearing at the time the deal was announced was an acceptable 1.3 times forecast combined EBITDA (excluding synergies). Down the track the deal is anticipated to be around 20% accretive to IOOF earnings from the second year following full integration and thereafter.
After deal completion, the ANZ assets will elevate the IOOF pro-forma business to second spot in Australia’s funds under advice ranking, give the combined business the second largest pool of financial advisers and place it in fifth spot in the funds under administration rankings.
From a thematic perspective, we like Australia’s financial services industry as a pool to fish in, as the superannuation market is huge and growing at an impressive pace. There has been some concern about pressure on margins and stiff competition after BT Financial cut fees on its super platform. The fact remains though that the Australian pension system is the third largest in the world and is forecast to hit $9.5 trillion by 2035, providing a solid backdrop for leading companies in the industry.
Source: APRA and Deloitte Actuaries & Consultants
Another appealing aspect of the deal IOOF has struck with ANZ is a 20-year strategic alliance agreement that will see the bank distribute IOOF wealth products through its Australian banking network. To reportedly provide channels to approximately 5.6 million retail customers and 0.5 million corporate, business and SME customers via ANZ channels – advisers and digital.
IOOF Holding’s CEO Chris Kelaher sounded particularly excited about this part of the deal and said, “It’s the partnership that is the icing on the cake. You can look at existing profit and what you’re purchasing, but it’s the growth piece into the future that’s exciting.”
Last week’s update advised that IOOF has entered into a non-binding term sheet with ANZ to accelerate the completion of the acquisition and are negotiating the final legally binding arrangements to give full legal ownership of ANZ ADGs from 1 October 2018. Furthermore, after an initial payment to ANZ of $800 million IOOF will receive 82% ownership of the economic interests in the ANZ P&I business from the same date. Completion of the acquisition of the ANZ P&I business is expected to occur towards the end of March 2019.
FUMAS Update
IOOF Holdings (ASX:IFL) achieved a record quarterly net inflow of $3.2 billion in funds under management, administration and advice (FUMA) in the June quarter. Total FUMA at 30 June 2018 was $125.9 billion. Funds under supervision were $35.7 billion, for total FUMAS of $161.7 billion.
Source: IOOF Holdings (ASX:IFL)
Net inflow by segment in the June quarter were $2.45 billion for Advice, up 58% year-on-year, while $666 million to platforms was up 30% from a year ago. Investment management saw an inflow of $130 million, down roughly 17% from $157 million in the comparable period of 2017.
Source: IOOF Holdings (ASX:IFL)
Regarding the outlook, IOOF has maintained its guidance broadly and said subject to Board approval it expects to keep its dividend flat, which is a decent outcome considering the larger share base after the capital raising to fund the acquisition of the ANZ businesses.
Recapping the 1H18 numbers and revenue was effectively flat year-on-year at $456.2 million. Statutory net profit after tax (NPAT) took a 39% hair cut to $45.2 million though, largely due to the costs associated with the ANZ acquisition and a non-cash $28.3 million goodwill impairment allocated to the Perennial Investment Partners business. Positively, underlying earnings before interest and amortisation (EBITA) increased $18.7 million, or 17% to $130.3 million and underlying net profit after tax (UNPAT) however increased 19% from a year earlier to come in at $94.8 million in 1H18. This equated to 29.8 cents per share, up 13% from 26.5 cents per share in 1H17. The following table shows the reconciliation between NPAT and UNPAT.
Cost management was a bright point, with operating expenditure falling $8.9 million on a year ago to $156.4 million in 1H18. That drove the cost-to-income ratio down 5.1 percentage points from 58.9% in 1H17 to 53.8% in 1H17.
Looking at the monthly chart, after reaching a high of $10.98 in May 2015, IOOF Holdings’ share price fell into correction-mode, and in the process, touched a low of $7.34 in February 2016. A move towards fresh all-time highs late last year at $11.94 has since been met with a fall back below previous resistance levels at $11 and subsequently $9.70. Prices are now flirting with support at $9.08 being the 78.6% Fibonacci retracement. The upward sloping green trend-line is also a buttress, and prices holding above here would be positive.
Turning to the daily chart, a zone of support between $10.34 and $10.39 has given way in this year’s sell off. The next layer of support existed around the $9.33 region, and has also been breached. A move back above this level, and also $9.23 (the 50 day moving average) is needed to improve the outlook.
Summary
IOOF Holdings (ASX:IFL) had a solid June quarter on the fund flows side, gathering a record net $3.2 billion for the quarter. Momentum from the first half of the year was positive, and we viewed the interim results overall as solid and believe the deal to acquire ANZ Bank’s wealth management business is a transformative one that will catapult IOOF up the rankings in the attractive Australian wealth management sector. The price was palatable, especially as the deal has considerable scope for cost synergies.
The shares are trading on 25.4 times forecast FY18 earnings, falling to 16.1 times the following year when it is expected to be digesting the businesses acquired from ANZ. The projected yield over the same time frame is 5.4% expanding to 5.9%.
We remain favourably disposed to an investment in IOOF Holdings’ shares based on our view that the company remains well placed to capitalise on the longer-term growth opportunity within its target markets.
Accordingly, we continue to recommend IOOF Holdings (ASX:IFL) as a buy for Members with no exposure to the stock.
Disclosures: IOOF Holdings (ASX:IFL) is held in the Fat Prophets Australian Share Income, Concentrated Australian Share and Small/Mid-Cap Models.
