Can IOOF Achieve Wealth Advice Synergies?
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The ANZ Wealth business IOOF Holdings ((IFL)) is acquiring has reported first half earnings of $39m. This was up $6m versus the prior corresponding half, driven by cost reductions as the restructuring business costs were excluded.
Bell Potter doubts whether all cost synergies and reductions can be achieved, given wealth advice is embroiled in the Royal Commission into banking misconduct. The broker believes it counter-intuitive to factor in cost savings that appear on the balance sheet today in addition to the $65m that IOOF is guiding upon completing the deal.
Not only is there a limited cost base to reduce, there are issues being raised in the Royal Commission regarding lack of compliance support and oversight in these sorts of businesses. Hence, Bell Potter downgrades its assumptions for cost synergies over the forward estimates to $50m from $65m.
Macquarie gives IOOF the benefit of the doubt, as outflows from closed products, gross margins and expenses were all better than it expected. While recognising emerging risks for the sector the broker finds it difficult to quantify the fundamental impact.
Moreover, Macquarie points out IOOF is currently trading at a -23% PE discount to industrials ex banks, versus a five-year average discount of around -7%, as the share price reflects the risks associated with the Royal Commission.
Yet, Bell Potter believes many of the key indicators apart from cost reductions are worsening. Out of the five products IOOF will acquire only one has positive flows and these have deteriorated over the recent periods.
Adviser numbers continue to dwindle and this, in turn, may worsen net flows before recommendations are put in place by the Royal Commission, which reports on February 1, 2019. Since the company announced the acquisition of ANZ's advice business the number of advisers it is set to acquire has fallen, and 49 ANZ-aligned advisers have departed since October.
ANZ signalled net outflows of $600m from the pensions & investments business and Macquarie points out, while aligned adviser numbers have declined by 40-50 in each of the last two half year periods, funds under administration were broadly stable.
Citi expects the market will become increasingly comfortable with the accretion associated with the acquisition and agrees the value of the stock is appealing. The broker observes both pro forma net profit and gross margin for the half year appear significantly higher than forecast, and it could be possible to add more upside to its estimates.
However, having already factored in over 20% accretion from the acquisition, and to reflect some ongoing uncertainty, Citi makes more modest upgrades for the present. The broker notes, despite market fears to the contrary, pensions & investments rose to $48bn as of March 31, 2018 despite a largely flat market.
In the company's defence, aligned dealer group funds under management on OnePath, the area where IOOF can extract revenue, also remained largely flat at $8.2bn in the quarter despite the fall in aligned advisers, and Citi flags no real acceleration in the outflows during the half year.
The broker also suspects that possible Royal Commission outcomes relating to back book pricing and product/advice separation are more likely to be medium-term risks.
There are five Buy ratings on FNArena's database. The consensus target is $11.92, suggesting 24.4% upside to the last share price. Targets range from $10.90 (Citi) to $13.00 (Morgan Stanley) The dividend yield on FY18 and FY19 forecasts is 5.6% and 6.5% respectively.
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