Stock of the Week – wealth manager performing despite the crisis

Stock: IOOF Holdings Limited

Stock code: IFL

Share Price: $6.45 (as at close 17/06/11)

P/E Ratio:  13.66 (Sector P/E 13.71)

Market Cap: $1,482,000,000

Broker Buy Recommendations:

Morningstar, $7.85 target (17th June 2011, share price was $6.45 that day)

Patersons Securities (14th June 2011, share price was $6.46 that day)

RBS Australia, $7.96 target (16th May 2011, share price was $6.61 that day)

E.L & C. Baillieu (8th May 2011, share price was $6.95 that day)

UBS, $8.15 target (20th April 2011, share price was $7.23 that day)

Intersuisse (4th April 2011, share price was $7.23 that day)

Investor Centre: IOOF Holdings Limited

Company news: IOOF Holdings Limited

Chart: Share price over the year to 17/06/2011

Since it hit $8.00 in January this year, IOOF Holdings (IFL) – the largest, independent full service wealth manager after AMP – has been on a steady slide, closing below $6.45 on Friday. And that was with the stock leaping from a near 1-year low of $6.28 the previous day. At these levels many brokers and analysts have upgraded the financial services stock to a buy.

Richard Morrow, a director of E.L & C. Baillieu Stockbroking thinks it’s a matter of sticking with momentum after IOOF Holdings posted a record underlying net profit after tax of $54.6 million for the six months to December 31, 2010. This represented a 16 per cent increase on the previous corresponding period. On another positive note, the company expects its full-year result to at least mirror its interim result. Morrow says the company is in a strong position after cutting annualised costs by 12 per cent and reducing its platform administration systems from eight to five. Funds under management, administration, advice and supervision were $102.9 billion at December 31, 2010, an increase of $3.8 billion in 12 months. 

Description

The IOOF Group is one of Australia’s largest independent and pure providers of wealth creation product and services. In April 2009, IOOF merged with Australian Wealth Management creating a fully integrated financial services company with offices in every state.

IOOF specialises in wealth management, superannuation, investment management, asset management, estate planning and corporate trust.

At 31 March 2011, IOOF had $104.5 billion in Funds Under Management, Administration, Advice, and Supervision. IOOF operates under a variety of brands including Bridges Financial Services, Consultum Financial Advisers, Perennial Investment Partners Limited, Australian Executor Trustees (AET), Spectrum Super, Pursuit, Wealth Builder and Ord Minnett.

Financials & Fundamentals

For the half-year ended 31 December 2010 NPAT up 25% to $46.22m, mostly due to revenue from a larger FUMAS base, as well as lower costs. The group’s FUMAS were $102.7bn as at 31 December 2010, an increase of $3.6bn from $99.1bn the previous year. Revenues from ordinary activities were $379.16m, down 10% from the same period last year. The interim dividend declared was 21 cents compared with 17 cents last year.

Financials for IFL for the past three years:

Link to company Earnings Report: IOOF Holdings Limited Full Year Earnings Report – to June 30th, 2010

Analysts

There is a horde of brokers and analysts lining up to place Buys on IFL, including RBS, UBS, Intersuisse, Patersons, Morningstar and E.L & C. Baillieu Stockbroking. Some have been bullish on the stock for a while, many have jumped on more recently, seeing value as the stock has slid to a level just off its 1-year low.

Hamza Habib, Patersons Securities has a buy on the mid-sized, vertically integrated wealth manager. ‘Growth in compulsory superannuation contributions add to the company’s growth profile…the financial services industry remains robust,’ says Habib. ‘With pressure on smaller firms to consolidate due to new reforms, IOOF will most likely continue growing via further acquisitions,’ he adds. Habib also believes that the company’s fully franked dividend yield above 6 per cent is attractive.

Peter Russell, Intersuisse believes that its record half-year result confirmed strong progress in efficiencies as it trims its eight platforms towards three by December and builds its funds, which are already above $100 billion. ‘Regulatory changes ahead will present opportunities as the industry consolidates. IOOF also offers a high dividend yield,’ says Russell.

Richard Batt, of Shadforth Financial Group also has a buy on IFL, and see the acquisition of Australian Wealth Management in 2009 as a positive step in broadening distribution reach and enabled earnings diversification. “The increased scale allowed the company to reduce overheads, which underpinned earnings,” Batt says. Stockmarket performance influences net inflows and funds under management, which can directly impact revenues, but Batt says growing net inflows demonstrates how strong and competitive IOOF is – even in volatile markets. IOOF has a strong balance sheet enabling it to pursue opportunities with excellent long-term growth prospects. “Australia’s compulsory superannuation regime should improve profitability,” he says.

On May 6 RBS Australia upgraded IFL to a Buy from a Hold, with a target price of $7.96 – mostly due to recent share price weakness. Morningstar also believes the stock is undervalued, placing the fair value for IFL at $7.85, which is 22% higher than Friday’s closing price. It also upgraded its earnings forecasts based on reduced operating expenses. Forecast NPAT for FY11 increases 4% from $111m to $116m and FY12 is up 3%, and forecast dividends increase to 41.0cps and 44.0cps for FY11 and FY12, based on a conservative payout ratio of 81%.

Richard Morrow, director of E.L & C. Baillieu Stockbroking also believes that the company is in a strong position after cutting annualised costs by 12 per cent. With diverse interests in financial planning, stockbroking, asset management and trustee services, Morrow says IOOF is a comfortable fit for long term portfolios, while generating an attractive fully-franked dividend yield above 5 per cent along the way.

Reuters analyst consensus is a BUY, with 5 buys, 2 outperforms, 4 holds and 0 sells. This is up from three months ago when there were 2 buys, 2 outperforms and 7 holds.

Risks

The risks in owning IFL shares are the same as for all financial services stocks – sharemarket corrections and bear markets, which limit the amount of funds under management and reduce retail inflows, all of which reduces the all-important management fee revenue. This could even turn into net outflows in what appears to currently be a sideways market if its investment performance deteriorates and investors run for the door. Equally, if competitors record far superior investment performance net outflows could increase.  Another concern is the failure to contain costs and the business risk associated with the recent merger with AWM.

Conclusion

Although brokers are very bullish on IFL, the sharemarket has been looking decidly shaky. That said, the stock is sitting near 52-week lows yet has plenty of support analysts around the country. A turnaround in fortunes for the Aussie market could see the stock head northwards rapidly.

Aside from those seeking share price gains, income-seekers may also wish to consider IOOF. The wealth management group is yielding about 5 per cent, fully franked. Consensus analyst estimates have yield rising to 5.8 per cent in 2010-11 and 6 per cent in 2011-12. Earlier this year IOOF reported a 16 per cent increase in half-year underlying net profit to $54.6 million – another record. Its funds under management, advice, administration and supervision increased by $3.8 billion to $102.9 billion. Believers in a medium-term recovery in global sharemarkets could do worse than consider wealth management stocks, which are strongly leveraged to the state of equity markets through their funds under management and fees.

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