Company Overview: IOOF Holdings Limited (ASX: IFL) is a financial services firm engaged in providing financial advice, portfolio & estate administration, and investment management products to its clients. It offers financial advice through its extensive network of advisers and helps its clients to grow and protect their wealth. It provides superannuation solutions for advisers, their clients, and employers in Australia. The company through its investment management know-how offers a range of highly rated multi-manager funds to its investors.

IFL Details

Collaboration & Acquisitions to Drive Growth: IOOF Holdings Limited (ASX: IFL) provides financial advice and investment management products to its clients. The market capitalisation of the company as on 8 February 2021, stood at ~$2.23 billion. As per a recent update, HUB24 Limited and IFL have agreed to collaborate and develop solutions, including an investment and superannuation wrap platform. Under the arrangement, HUB24 will provide custody and administration services for IFL’s new private label investment and superannuation solutions, extending its range of products and services to the IFL network and its clients. The company believes the collaboration to be a positive step in its continued focus to develop the Evolve platform.

The company has delivered a resilient performance in FY20, despite the volatile market environment due to the outbreak of the COVID-19 pandemic. Statutory NPAT stood at $147 million, including profit on the sale of non-core businesses. FUMA position grew by ~46% to $202.3 billion, compared to FY19. The company witnessed net inflows of $1.3 billion in the platform segment and net inflows of $730 million from the advice segment.  

FY20 Financial Performance (Source: Company Reports)

Q2FY21 Business Update: The company has witnessed favourable market movement during the quarter, reflecting an uplift of $12.7 billion in the FUMA position. It was offset by one-off the negative movements of $10 billion. FUMA stood at $202.4 billion during Q2FY21, which was down by $0.4 billion when compared to the September 2020 quarter. There was a net outflow of $1.3 billion from the financial advice business segment, including outflows as a result of the business transformation under Advice2.0. In the investment management segment, there were net outflows of $2.2 billion, which includes $1.9 billion of outflows due to reinvestment simplification into external interest-bearing cash accounts, thereby providing improved client outcomes. There were $40 million of net inflows in the portfolio & estate administration segment.

Funds Movement During H1FY21 (Source: Company Reports)

IFL’s Proposed Acquisition of MLC to Go Unopposed: The ACCC has announced that it will not oppose IFL’s proposed acquisition of MLC. The company believes that MLC will further complement its wealth management business and will provide significant benefits and value proposition for its clients and shareholders.

Update on Court of Appeal: On February 5, 2021, IFL informed the market regarding the judgment made by the Court of Appeal of the Supreme Court of New South Wales (NSW) in Australian Executors Trustees (SA) Ltd (AET) versus Kerr. The appeal case began in 2012. On 26 September 2019, the Court of Appeal rejected AET’s petition in opposition to the decision made by the Supreme Court of NSW and instructed AET to reimburse the defendants’ expenses related to the appeal. Further, following the verdict made by the Supreme Court of NSW, IFL notified the ASX of possible exposure of ~$16.5 million on 27 September 2019. Post the decision, the exposure to IFL, net of insurance proceeds, including interest and excluding costs stood at around $16.5 million to $19 million pre-tax and ~ $11.6 million to $13.3 million post tax. Notably, on 2 November 2018, sale of the AET corporate trust business was completed by IFL.

Top 10 Shareholders: The top 10 shareholders together form around 27.58% of the total shareholding while the top 4 constitute the maximum holding. Nikko Asset Management Australia Limited and Martin Currie Australia Ltd. are holding a maximum stake in the company at 8.54% and 4.9%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group

Key Metrics: The company delivered a resilient performance in FY20, despite having a difficult year in operations due to the outbreak of the COVID-19 pandemic. It reported gross margins of 52.3% in FY20 and an EBITDA margin of 16.9% There was an increase in the net margin to 4.9% during the year, compared to a negative 2.7% during FY19. Hence, ROE of the company stood at 3.4% in FY20, an improvement from negative 2% in FY19. The cash position of the company was at $374.73 million as on 30 June 2020, and it had borrowings of $572.25 million during the same period end.

Revenue and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company operates in the financial services sector and is exposed to cybersecurity risks. In this regard, it has a dedicated cybersecurity and risk team in place, to enhance cyber controls. There is stiff competition among the players in the sector for client’s investments to grow their business. A competitive market might impact IFL’s earnings by reducing its market share, and as such, it must invest continuously in client service, product design and other aspects. It depends on the efficacy and expertise of its key employees, and any loss or unavailability of the personnel can impact the operations of the company in the near to medium term. The company is also dependent on strategic acquisitions for inorganic growth and any adverse impact to attain synergy with the acquired entity, might impact the profitability of the company. The Group is heavily dependent on IT systems and processes for its functioning and has to ensure for its smooth functioning to avoid any unwanted interruptions in its business.

Outlook: The company is optimistic on its prospects going forward and remains on track to deliver $43 million of annualised synergies from the P&I integration by 30 June 2021. IFL has also announced that its proposed acquisition of MLC has made key inroads. It has received lenders’ consent for the acquisition on 8 October 2020, and the transaction will not be opposed by ACCC. The company is looking to build scale in the long term and includes two key strategic initiatives; Evolve 21 – simplifying its platform suite down to one platform; Advice2.0- deliver accessible and cost-effective financial advice to more Australians.

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The company has witnessed growth in the number of accounts opened and the total number of licensees by utilising the Evolve platform, during Q2FY21. As per ASX, the stock of IFL is trading below its average 52-weeks’ high and low levels of $6.7-$2.505, respectively. The stock of IFL gave a positive return of ~8.2% in the past three months and a negative return of ~1.2% in the past one month. On a technical analysis front, the stock of IFL has a support level of ~$3.091 and a resistance level of ~$3.936. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer median, considering its acquisition synergies, decent financial performance, restructuring activities, cost cutting initiatives and annualised synergies from the P&I integration. For the purpose, we have taken peers such as Pendal Group Ltd (ASX: PDL), Perpetual Ltd (ASX: PPT), Platinum Asset Management Ltd (ASX: PTM), to name a few. Considering the current trading levels, expected synergy from collaborations and acquisitions, resilient financial performance, and simplified product restructuring, we recommend a ‘Buy’ rating on the stock at the current market price of $3.42, down 0.582%, as on 8 February 2021.

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

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