Company Overview: IOOF Holdings Limited (ASX: IFL) is one of the largest groups in the financial services industry, which provides advisers and their clients with financial advice, portfolio management and administration, and investment management. The company’s financial advisers provide enduring value to clients and help them to navigate their way through a range of financial products and services. The IOOF Pursuit platform offers multiple retail insurers, group insurance, tax effective features, and smart online trading and transacting capabilities and offers a wide range of highly rated multi-manager funds providing an easy and effective way to diversify investment portfolios.

IFL Details

Decent Increase in Gross Margin and Significant Benefits for its stakeholders: IOOF Holdings Limited (ASX: IFL) is one of the largest groups in the financial services industry, which provides advisers and their clients with financial advice, portfolio management and administration, and investment management. As on 23 November 2020, the market capitalization of the company stood at ~$2.33 billion. The company retains a diversified business model and is focused on its long-term strategy to reshape its business to be at the forefront of the wealth management industry. IFL is building scale in its business with the help of Evolve 21, which is simplifying its platform to one contemporary platform; and Advice 2.0 which will allow the company to deliver more accessible and cost effective financial advice for the long term benefit.

Against the COVID-19 backdrop, the company has demonstrated strength and resilience in its performance. During FY20, average Funds Under Management, Administration and Advice (FUMA) went up by 21.3% on prior year to $136.7 billion, due to the inclusion of the ex-ANZ AL average FUMA of $16.2 billion. However, other revenues of the company went down due to lower conference revenue because of the cancellation of conferences due to COVID-19 restriction. At the end of the same period, gross margin of the company went up by 16.3% to $577.6 million from $496.8 million in FY19. During FY20, profit from continuing operations stood at $58.79 million, reflecting an increase from a loss of $29.81 million in FY19. The company reported a healthy balance sheet with a cash balance of $374.7 million and with loans and borrowings of $572.25 million. The Board has declared a final dividend of 11.5 cents per share, reflecting a total payout ratio of 75%. The group’s total shareholder’s return (TSR) for the year ended 30 June 2020 stood at 1.8%, with a dividend yield of 6.7%, partially offset by share price decline of 4.8%.

The company has diversified income streams and scale and seems well-positioned with financial strength to withstand the present crisis. It retains a clear strategy to transform its business which will generate significant benefits for its stakeholders.

FY20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of IOOF Holdings Limited. Nikko Asset Management Australia Limited is the largest shareholder in the company, with a percentage holding of 8.54%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During FY20, gross margin of the company stood at 52.3% and net margin of the company was 4.9%. In the same time span, EBITDA margin of the company was 16.9% as compared to the industry median of 58.8%. During FY20, Return on Equity of the company stood at 3.4%, reflecting an increase from a negative 2% in FY19. Looking at the balance sheet, assets/equity ratio of the company was 2.44x, lower than the industry median of 4.51x, and debt/equity ratio stood at 0.33x relative to the industry median of 0.49x. This shows that the business is financed with a larger proportion of investor funding and retains a financially stable balance sheet.

Key Margins (Source: Refinitiv, Thomson Reuters)

Quarterly Highlights (For the Period Ended 30 September 2020): During the quarter ended 30 September 2020, the company reported an increase of $529 million in FUMA to $202.8 billion, and reported net inflows of $110 million from financial advice. At the end of the same period, Portfolio & Estate Administration experienced continued net inflows of $226 million and saw a growth in the number of accounts and licensees. However, the investment management segment witnessed outflows of $62 million because of the seasonal timing of distributions and ERS withdrawals.

Quarterly Funds Movement (Source: Company Reports)

Acquisition of MLC: The company has a unique opportunity to create a leading advice-led wealth manager in Australia with ~$510 billion FUMA and 1,884 advisers via transformation acquisition of MLC. The benefits of common purpose and scale will deliver change in clients, members, advisers, and shareholder outcomes. The MLC acquisition is likely to provide IFL with greater scale and efficiency, and the capacity to deliver positive long-term outcomes. The acquisition has accretive valuations wherein the purchase price of $1,440 million represents pro forma FY20 UNPAT of 7.4x. The combined entity is likely to deliver EPS accretion of over 20% on an FY21F pro forma basis and is targeting return on funds employed of 15% by the third year of ownership.

Key Investment Risks: The material risks faced by the IOOF Group include stiff competition, dependence on key personnel and financial advisers, risks related to acquisitions, conduct risk of delivering poor outcomes for stakeholders, exposure to regulatory action or litigation. The company is also susceptible to the risks related to brand and reputation, operational risks including unit pricing errors, risks related to information technology etc. There is also a risk of significant failure in the company’s operations or material financial loss because of cyber-attacks.

Future Expectations and Outlook: Despite the impacts from the COVID-19 pandemic, the company remained focused on its long-term strategy to reshape its business to be at the forefront of the wealth management industry. The company is building scale and seems well-placed to deliver better long-term outcomes for clients, members, advisers, and shareholders through the acquisition of MLC. IFL remains on track to deliver total synergies of $68 million by FY22 on an annualized basis. The company is focused on advice-led wealth management and is prioritizing consolidation to one platform by the end of 2021. IFL is also focused on re-organizing its operating structure of advice businesses to meet the changing needs of clients.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Despite the significant challenges, the company retains a healthy financial position and achieved the milestone of $200 billion funds under management, advice, and administration. As per ASX, the stock of IFL is trading close to its 52-weeks’ low levels of $2.505, proffering a decent opportunity for the investors to enter the market. The company is likely to hold its AGM on 25 November 2020. The stock of IFL gave a negative return of 10.14% in the past three months but a positive return of 9.09% in the last one month. On a technical front, the stock of IFL has a support level of ~$2.713 and a resistance level of ~$3.842. We have valued the stock using the price to earnings multiple based illustrative relative valuation and have arrived at a target price offering an upside of lower double-digit (in % terms). Considering the current trading levels, resilient financial position, modest long-term outlook, and the expected synergies from the acquisition of MLC, we recommend a ‘Buy’ rating on the stock at the current market price of $3.60, up by 0.278% on 23 November 2020.

IFL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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