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Date : 02/11/2020

IOOF Holdings Ltd (ASX : IFL)

ASX :

IFL

Market Cap : $1.89 Billion

Dividend Per Share : $0.11

Dividend Yield : 9.41 %

Buy

52 Week Range : $2.69 - $8.36

Share Price : $2.88

The firm has been impacted by Covid19, however it is showing its resiliance. The Q1 performance has been better than expected and we estimate it to recover. A "Buy" from us for the long-term.

Company Analysis

 

IOOF Holdings (ASX: IFL) and most of the financial services sector has been hit hard by the pandemic. Since the lows of March, the stock rallied partially. But, since investors realised the deep impacts the pandemic has caused to the economy and the financial wellbeing of Australians, the stock has been on a downward trajectory. It now trades at $2.88 a share.


Source: Tradingview.com

The financial advice, portfolio management and investment management industries are all affected. Growth in funds under management has dried up since more Australians are out of jobs and the government has enabled Australians to access their super funds by means of an early withdrawal. These measures and support that aid Australians that are most impacted by the pandemic has resulted in impacting the financial services industry. IOOF Holdings provided a business update just last week that clarifies the same. Among the highlights were:

  • The pension & investments segment has paid 57,776 requests for early withdrawal. This translates to $461 million.
  • Excluding P&I, IOOF has paid out $158 million to 20,114 filing requests for early withdrawal.

These reductions have impacted Q1 of FY2021 for the firm. The firm reckons that the total payments that were made to their clients was around $743 million during the quarter. The investment management segment has also seen an outflow in capital – $62 million worth. Financial Advice and Portfolio & Estate Management segments have slightly different profiles of clients in addition to the profile of P&I. These services are rendered by people who have the extra money to invest during this crisis.

The Financial Advice segment saw a net inflow of $110 million, while Portfolio and Estate Administration saw a $226 million inflow. There is reason to believe that Australia is recovering from the pandemic. However, on a broader scale of things, it will still take a lot of time.

The movement of the funds under management & administration (FUMA) can be seen in the below table.


Source: IOOF Holdings

The impact on the P&I business is forecasted to continue during Q2 of FY2021. However, it should ease up and recover along with the economy. In the September quarter, IOOF has managed to increase its funds under management by $529 million.

Outlook

Organic growth has been hard to come by for IOOF. The financial services industry in Australia as a whole is in structural decline. The inflows in the advice segment despite the pandemic indicates that IOOF has been able to and still in regaining footing since the Royal Commission debacle.

Since our last report, the financials are unchanged and hence so are the metrics that determine profitability and financial health. Since the acquisition of MLC is being funded by equity, the risk levels of the firm should remain the same, especially considering the grim economic outlook. While the returns on equity will be affected in the short term, we believe the long-term outlook of earnings and returns to shareholders should increase as the firm is gaining more market share by acquiring chunks of its once competitors.

AMP is IOOF’s biggest competitor and has been distressed. However, the recent acquisition talks of AMP by private equity firm Ares Management has led to massive speculation. Given the outlook of AMP and the current state of its business, IOOF in the long-term still remains a much safer bet for investors.

One of the other concerning factors that has driven investors away from IOOF is its dividend policy. The firm’s reduced performance and massive restructuring costs in the past few years have dented the profitability of IOOF. However, their business model has held up well. The management has continued to change aspects of its business to better position themselves in an industry that is structural decline.

The recent acquisition of MLC not only increases the client base and FUM of IOOF. The synergies arising out of the deal is forecasted to add $150 million per annum within 3 years. Earnings per share are estimated to grow by 20%. The reduced dividend should not worry investors too much in our opinion as we know that IOOF has not paid out dividends by borrowing money. This ensures that the financial health of IOOF will not be damaged. The negative reaction by the markets to this announcement still has the shock trading lower than its fair value.

Recommendation

IOOF Holdings has been impacted by the effects Covid19 has had on the economy. The bedrock of the firm, however, has not changed. It is still in a significantly strong position and has a very flexible balance sheet. The acquisition of MLC has made IOOF into the largest financial advisor in Australia and we estimate it to recover quicker than its peers. The Q1 update provided by the firm also shows its resilience with a net positive inflow of FUM. We continue to tell our members to “Buy” IOOF Holdings for the long-term.

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