Wealth manager IOOF Holdings ((IFL)) appears reluctant to divulge too much detail about the changes to its business as it adjusts to the restructuring that is occurring across fund management platforms and adviser groups.
Bell Potter is sharply critical of the company when it comes to providing information. Details for the reinvigorated ANZ OnePath P&I (pensions and investment) transaction have been scant, other than a lower agreed price that was announced on October 18. The revised price was $850m, a -$125m reduction from the original sale price announced in October 2017, and warranties have changed – apparently.
ANZ Bank ((ANZ)) agreed in July 2018 to transfer a partial economic interest in its OnePath P&I business and the legal ownership of its aligned dealer group (ADG) to IOOF from October 1, 2018 but completing the deal has faced hurdles ever since, including court action by APRA (Australian Prudential Regulatory Authority).
This deal is still technically at risk, as approval from APRA remains outstanding. Bell Potter suspects the metrics have deteriorated and the synergies on offer are not the same as originally conceived. After two years of waiting, the broker suspects APRA may not approve the transaction. IOOF has received a no-objection notice from OnePath Custodians.
The company will need to successfully integrate and deliver on $65m (original) in expected synergies, Macquarie emphasises, and the source of upside will be if the ANZ ADG can be returned to break even. The broker believes flows are holding up well considering the tough industry backdrop.
Credit Suisse has a view that no news is good news, noting “these beaten up wealth players” are trading at a significant discount to the market. The broker believes the ANZ P&I acquisition is more likely to go ahead now, and this should support strong earnings growth and a re-rating of the share price.
Citi agrees IOOF faces major hurdles, such as the need to restructure the economics of its advice business, but believes the added scale and associated cost synergies from the ANZ P&I deal should provide some flexibility.
September quarter net inflows of $165m beat Morgan Stanley’s forecasts and compare with $75m in net inflows in the prior corresponding quarter. Funds under administration and management in the quarter were up 3% to $142.7m largely, brokers note, on the back of supportive markets. Excluding ANZ ADG, net outflows were -$124m in the September quarter. Morgan Stanley expects this to be offset by the opportunity to capture displaced bank-aligned advisers.
IOOF may be enjoying greater stability in funds under administration versus its major peers but only its platform division has experienced positive net flows in the past year, UBS points out, and suggests growth prospects after the initial step up related to the P&I are limited.
Shadforth
Citi considers the fund flows reasonably resilient in the context of the current market and competitive offerings from peers. The company has highlighted the benefits from the increased capture of Shadforth inflows following its platform investments (Project Evolve) in late 2018.
The Shadforth service appears to be slightly cheaper than BT Panorama for higher balances and this contributed strongly to flows in the March and June quarter. The broker envisages this offering, while likely to be lower margin, should at least provide a solution to maintain adviser-sourced funds within IOOF rather than have these leak to external platforms.
The advice segment flows and the recently-acquired ANZ ADG flows were minimal albeit positive in the quarter. Citi found this respectable, given the disruption affecting the whole adviser industry.
Still, Bell Potter questions how the IOOF platform, which consistently rates in the bottom quartile in the Strategic Insights platform report, can be viewed as the best option for the Shadforth and Bridges network. Margin pressure continues in the platform and advice businesses and, while the advice business is being restructured, cost metrics are yet to be provided.
Remediation Shortfall
Moreover, Bell Potter assesses the company’s review of client remediation falls significantly short of expectations, as IOOF’s costs are a sixth of the average of the major banks on a per-adviser basis. Hence, the broker suspects a further $1bn to cover the shortfall may be required.
Bell Potter is incredulous when it comes to the insufficient provisions, as the company has not checked back beyond seven years, nor with all advisers that have ever worked for IOOF. Details will be hard to avoid, the broker suspects, when the company has to publish its first half results.
Citi acknowledges clarity on a new strategy is unlikely until 2020 and suggests, while the new advice model is likely to require capital, the company is not in a position to quantify the amount.
Bell Potter sums up its view that the company is stuck in the “old world model” whereby it buys advice distribution and utilises its products to maximise returns, and this is likely to become harder to achieve.
Bell Potter, not one of the seven monitored daily on the FNArena database, has a $4 target and Sell rating. Ord Minnett has the single Sell rating on the database, with three Hold and two Buy making up the remainder.
The consensus target is $6.90, signalling -7.8% downside to the last share price. This compares with $5.40 ahead of the October 18 update. Targets range from $4.95 (Morgan Stanley) to $8.45 (Credit Suisse). The dividend yield on FY20 and FY21 forecasts is 4.3% and 5.3% respectively.
