Company Overview: IOOF Holdings Limited (ASX: IFL) is engaged in the business of wealth management and provides its services to advisers and their clients. Its key business vertical consists of the following core segments – Financial Advice: Services through its extensive network of financial advisers; Portfolio & Estate Administration: Caters to advisers, their clients, and hundreds of employers in Australia according to different needs and goals; Investment Management: Products are designed to suit the investors’ needs.

IFL Details

Growth in FUMA Driven by Positive Market Performance: The Company is focused on the successful execution of Advice 2.0, Evolve21, and Transformation.

• Advice 2.0: The Group's objective is to make advice more affordable and accessible for Australians. It hopes to achieve this through increased client engagement, efficient advice models, and offering compelling value propositions across each advice channel.
• Evolve21: It is expected to enable simplification of the business through consolidating all IOOF proprietary platforms into a single contemporary platform by the end of the calendar year 2021. IFL has successfully completed Phase 1 of the product migration in June 2021 with the migration of 38,600 member accounts.
• Transformation: The company is also focused on putting together the IOOF ex-ANZ P&I and MLC businesses to prioritise client outcomes, while also keeping in mind on achieving the synergy goals through improvement in scale and efficiency.

Q1FY22 Business Updates:

IFL reported resilient business performance during the period and delivered continued growth in Funds under Management and Administration (FUMA).

• The Group reported restated FUMA levels at $321.1 billion as of 30 September 2021, reflecting an increase of ~$2.4 billion over the levels as of 30 June 2021.
• During the period end, the company maintained active advice services relationships with 1,883 financial advisers, which was marginally lower than the previous quarter-end period.
• It has made strategic progress in executing its transformation program and has prioritised the simplification of the operating model, as well as client engagement and well-being. The recent repoint of Frank Lombardo, Chief Operating Office, to the Technology division also bolsters the Group’s technology capabilities in its transformation phase.

Revenue Trend (Source: Analysis by Kalkine Group)

Overview of FUMA Performance:

FUMA of the Group increased by $2.4 billion to $321.1 billion as of 30 September 2021. This was achieved on the back of improved performance in FUA and FUM during the period, Q1FY22.

• Funds Under Administration: It grew by $1.8 billion during the quarter to $222.8 billion. There were pension payments of $0.8 billion and net outflows of $0.9 billion. However, the impact was offset by positive market movements of $3.4 billion during Q1FY22.
• Funds Under Management: FUM increased by $0.6 billion during the quarter to $98.3 billion, aided by market gains of $2 billion and offset by net outflows of $1.4 billion.
• Advice: The number of practices in the Self-Employed channel decreased by 37 to 539 during the quarter. A slight increase in the Employed channel was offset by a decline in the Self-Employed and Self-Licensed channels.

Top 10 Shareholders: The top 10 shareholders together form around 31.80% of the total shareholding, while the top 4 constitute the maximum holding. Tyndall Asset Management and Martin Currie Australia are holding a maximum stake in the company at 8.39% and 5.89%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported decent margin performance in FY21, with an uptick in both gross margin & EBITDA margin when compared to FY20. It has also reported a slight improvement in the debt-to-equity ratio to 0.31x in FY21, compared to 0.33x in FY20. It ended the period with cash position of $670.7 million as of 30 June 2021, compared to $374.7 million as of 30 June 2020.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Investment Risk: The Group’s line of business makes it prone to investment risks and the volatility of the investment markets.
• Regulatory Risk: The company’s business activities are under the strict purview of regulatory authorities and thus expose it to regulatory risks.
• Cyber Security Risk: This is one of the major risks faced by the Group, given that it has exposure to a large number of clients' confidential data. Any breach in security by cyber criminals poses a threat to the credibility of IFL.

Outlook: The company stated that it has made significant progress in the transformation of its business, post the first six months of acquisition of MLC. The Group maintains that the previously guided combined acquisition pre-tax synergy run-rate target of $218 million per annum by the end of FY2024, and the FY22 synergy run-rate range of $80-100 million, remains on track. IFL has updated that after successfully completing the Phase 1 product migration for Evove21 in June 2021, it plans to complete Phase 2 in December 2021.

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

Source: 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: As per a recent update, the company has proposed to rebrand itself from IOOF Holdings Ltd to Insignia Financial Ltd, in order to align itself with its transformation phase. This is subject to shareholders' approval in the AGM to be held on 25 November 2021. As per ASX, the stock of IFL is trading below its 52-weeks’ average levels of $2.860-$5.390. The stock of IFL gave a positive return of ~13.905% in the past six months and a negative return of ~9.21% in the past one week. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ median P/E multiple, considering the inherent risk in the sector,  and volatile market movements. For the purpose of valuation, few peers like Magellan Financial Group Ltd (ASX: MFG), Platinum Asset Management Ltd (ASX: PTM), Navigator Global Investments Ltd (ASX: NGI) have been considered. Considering the expected upside in valuation & current trading levels, growth in FUMA, decent performance in Q1 FY22, implementation of transformation phase for the company and expected synergy benefits from the strategic acquisitions, we recommend a ‘Buy’ rating on the stock at the current market price of $4.06, as on 01 November 2021, 03:01 PM (GMT+10), Sydney, Eastern Australia.

IFL Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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