Company Overview: IOOF Holdings Limited (ASX: IFL) is engaged in providing financial advice to clients, portfolio and estate administration, investment management. It offers financial planning advice and stockbroking services under its financial advice and distribution segment. In its portfolio and estate administration segment, it provides management services through its platforms. Under the investment management segment, it invests on behalf of corporate, superannuation, institutional clients, and private individual investors. The company earns its revenue mainly through the management and services fees it charges to the clients.

IFL Details

Decent Increase in FUMA Position & Platform Upgradation to Aid Growth: IOOF Holdings Limited (ASX: IFL) is engaged in providing financial advisory services, portfolio management and administration for advisers and their clients and investment management products according to investor’s needs. The market capitalisation of the company as on 14 December 2020, stood at ~$2.35 billion. The company remains on track to build scale its business for the long-term benefit of all the stakeholders. This includes initiatives like – simplifying their platform suite to one contemporary platform known as Evolve 21, and Advice 2.0, which are likely to aid the company to deliver more cost-effective and accessible financial advice to clients.

During 1QFY2021, the company’s Funds Under Management, Advice and Administration (FUMA) was up by $529 million to $202.8 billion. This increase was achieved despite the volatile business environment induced by the COVID-19 pandemic. It had $110 million net inflows from the Financial Advice segment, compared to $46 million net inflow in the prior comparable period. The Portfolio & Estate Administration segment saw decent net inflows of $226 million, compared to $396 million net inflow in the pcp. There was a net outflow of $62 million from the Investment Management segment. Pensions & Investments witnessed net outflows of $411 million, during the period. According to the company, the net flows had an impact from the payments made under the Early Release of Super (ERS) scheme. However, the scale and diversity of the business aided in maintaining a steady FUMA position.

FUMA Position as on 30 September 2020 (Source: Company Reports)

MLC Acquisition to go Unopposed: As per the latest release, the ACCC will not oppose the proposed acquisition of MLC Wealth Management by IFL. It is expected that the market share of the company post-acquisition would be ~10%. The company believes the acquisition of MLC augurs well for them, as it is a high-quality asset. It expects to provide an excess of 20% earnings per share accretion, once the synergy with MLC is achieved.

Quick Look into the Segment Performance: Despite the volatile past few months due to the COVID-19 pandemic, the performance of the Financial Advice and Distribution segment in FY20 was resilient owing to the growth in average funds through net inflows. The growth was also aided by competitive pricing, matched with third party administrators. There was a decrease of 3% in the operating expenditure to $103.57 million in FY20, from $106.86 million in FY19.

Under the Portfolio and Estate Administration segment, there was a decrease in net operating revenue by 8.8% to $211.43 million in FY20, from $231.95 million in FY19. This was due to net funds diminution as a result of market volatility, and also due to funds movement from higher-priced legacy and transition platforms to contemporary platforms with competitive fees. Operating expenditure increased as a result of implementation of the Office of the Superannuation Trustee and additional Risk and Compliance FTE.

There was an improvement in the net operating revenue in the Investment Management segment, which was in line with higher average FUMA for FY20. Underlying profit after tax increased by 7.3% to $37.66 million, for the period ended 30 June 2020.

Segment Performance in FY20 (Source: Company Reports)

Details of Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 26.27% of the total shareholding. Nikko Asset Management Australia Limited is the largest shareholder in the company, with the percentage holding of 8.54%. Martin Currie Australia holds the second maximum interests in the company at 4.90%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The company reported gross margins of 52.3% in FY20, from 58.2% in FY19. There was a decrease in EBITDA margins to 16.9% as compared to 25.6%, during the same period. Margins were impacted due to the market volatility owing to the COVID-19 pandemic. However, it reported an increase in net margins to 4.9% in FY20, from a negative 2.7% in the previous corresponding period. ROE also improved to 3.4% during the period, from a negative 2% reported in FY19. There was an increase in the cash cycle from 13.4 days in FY19, to 76.8 days in FY20. Net borrowings were at $430.9 million, reflecting an increase from the prior period and therefore there was an increase in leverage to 0.33x in FY20, from 0.26x in FY19.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: IFL operates in a challenging and competitive business environment, and as such, is exposed to few business risks. There is competition for the market share of clients and investments in the space where the company operates, and the company has to invest in its products and services in order to mitigate the risks. It is dependent on its employees for its performance, and any loss or unavailability of them could lead to disruption in the operations from short to medium term. The Group is dependent on the acquisition of portfolios for revenue enhancement, and any adverse impact on the acquired portfolio may impact the consolidated earnings of the company. The company relies on IT platforms and systems to carry out its operations, and any disruption on this aspect may lead to impact in business continuity. IFL also has to take care of risks associated with cyber security.

Outlook: The company has delivered a decent financial performance in FY20 and was able to grow its FUMA portfolio in 1QFY21, despite the challenges posed by COVID-19 pandemic. The industry trend seems to be favourable for the sector with increasing per capita wealth, aging population with complex needs and opportunities brought in by the disruption in the market. During FY20, IFL completed the acquisition of the ANZ P&I business and expects to further scale up its operations. The company is anticipating to deliver ~$68 million in total synergies by FY22, from the integration of its P&I business. The company is looking to scale up its business with strategic initiatives like the implementation of Evolve 21 and Advice 2.0. This will allow them to service more clients in a cost-effective and accessible manner. The acquisition of MLC is under process and it expects to complete it by June 2021. This synergy of quality portfolio holdings augurs well for IFL and will provide revenue visibility in years to come.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company delivered resilient financial performance, despite the COVID-19 impact on the business environment. It reported an increase of $529 million in FUMA to $202.8 billion for the quarter ended 30 September 2020, from the previous quarter. The company expects to gain market share from the synergy created across the businesses. As per ASX, the stock of IFL is trading below its average 52-weeks’ levels of $2.505-$7.782, proffering a decent opportunity for the investors to enter the stock. The stock of IFL gave a return of 20.32% in the past three months and a return of 12.69% in the last one month. On a technical analysis front, the stock of IFL has a support level of ~$3.286 and a resistance level of ~$4.272. We have valued the stock using the P/CF multiple based illustrative relative valuation and have arrived at a target price of lower double-digit upside (in % terms). For the purpose, we have taken peers such as Pendal Group Limited (ASX: PDL), Perpetual Limited (ASX: PPT), Platinum Asset Management Limited (ASX: PTM), to name a few. Considering the current trading levels, decent financial performance, acquisition of quality portfolio assets and its focus on business upgradation, we recommend a ‘Buy’ rating on the stock at the current market price of $3.73, up by 2.754% as on 14 December 2020.

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

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