Company Overview: IOOF Holdings Ltd (ASX: IFL) provides financial advice to its clients and engages itself in the following domains – Financial Advice: Delivers services through its extensive network of financial advisers; Portfolio & Estate Administration: Services its advisers and their clients; Investment Management: Products customised as per the investor’s requirements. The company has also added the businesses of MLC Wealth to its portfolio from National Australia Bank on 31 May 2021.

IFL Details

Decent Revenue Growth Aided by Rise in FUMA & Synergy from Acquisitions: IFL has acquired ANZ P&I and MLC, which provides a strong base to the company to become a diversified wealth management business going forward. The acquisitions significantly enhance the product offerings across the major segments – Advice, Platforms, and Asset Management.

Transformation Update:

The company has progressed on its transformation objectives with regard to its platform enhancement and delivered improved performance.

• It reported an EBITDA of $20.8 million in FY21 from the Advice-led wealth management segment, owing to savings in back-office expenses. The operational features of departures, transitions and additions seem to be aligned with the long-term sustainable advice model.
• The migration to Evolve seems to be on track and is scheduled for completion by December 2021 for the Portfolio and Estate Administration business unit. The synergy targets from ANZ P&I have been delivered and along with the synergy from MLC acquisition, the vertical seems to be poised for growth.
• The direct capabilities of the company in the Investment Management segment expands the growth opportunities of IFL.

FY21 Performance Overview:

During the year, the company has successfully completed the acquisition of MLC and has achieved a synergy run-rate of ~$12million per annum as of 30 June 2021.

• Revenue grew to ~$1.33 billion in FY21, compared to revenue of $1.08 billion in FY20. The growth has been aided by growth in organic revenue through higher FUMA balances driven by an uptick in equity markets.
• The Group reported an NPAT of negative $143.5 million in FY21, impacted by non -cash impairment of ~$200 million and the expenses related to the integration with P&L and MLC acquisitions.
• The management declared a dividend of 11.5 cents per share in H2FY21. The total dividends in FY21 stood at 23 cents per share.

Trend in Revenue (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 32.72% 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 9.66% and 5.89%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported an improvement in the gross margin performance to 63.2% in FY21, compared to 56.6% in FY20. EBITDA margin also improved to 21.8% in FY21, from a level of 18.6% in FY20. It ended the period with a cash position of $670.7 million as of 30 June 2021, compared to $374.7 million as of 30 June 2020. There has been a slight improvement in the debt-to-equity ratio of the company to 0.31x in FY21, down from a level of 0.33x in FY20.

Profitability Profile and Liquidity Profile (Source: Analysis by Kalkine Group)

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

• Acquisition Risks: IFL is dependent on strategic acquisitions for its business expansion, and any challenge in integrating the acquired businesses into its operations might impact the overall profitability of the Group.
• Regulatory Risks: The company's line of business makes it prone to the purview of a prudent regulatory overview.
• Macro Risk: Since the company is dependent on the performance of the equity markets for its profitability, it is also exposed to macro-economic challenges like the ongoing impact of the COVID-19 pandemic.

Outlook: The company seems to be well-positioned to leverage on the growing opportunities in the market going forward. It plans to expand its addressable market with an increase to ~12% in Super contribution by 2025. IFL anticipates to unlock long-term benefits of scale and margin through its focused strategy of platform simplification. It has successfully completed the acquisition of MLC on 31 May 2021, and it is on track to deliver synergy run-rate of $80-$100 million per annum by the end of the FY22 period.

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: Funds Under Management, Administration and Advice (FUMA – ex-MLC) stood at $213.3 billion as of 30 June 2021, compared to $202.3 billion as of 30 June 2020. As per ASX, the stock of IFL is trading above its average 52-weeks’ levels of $2.860-$5.390. The stock of IFL gave a positive return of ~3.43% in the past three months and a negative return of ~1.34% in the past one month. 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, considering the possible threat and presence of COVID-19 pandemic, asset impairment charges and macro risks in the equity markets. For the purpose of valuation, few peers like Perpetual Ltd (ASX: PPT), Magellan Financial Group Ltd (ASX: MFG), Platinum Asset Management Ltd (ASX: PTM) have been considered. Considering the expected upside in valuation, increase in FUMA levels, completion of acquisition of MLC, decent rise in revenues and expected synergy benefits from acquisitions, we recommend a ‘Buy’ rating on the stock at the current market price of $4.31, (as on 27 September 2021, 10:05 AM (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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