P&I In The Bag But IOOF Has Its Work Cut Out

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IOOF Holdings has finally completed the acquisition of the ANZ P&I business, and provided softer-than-expected first half guidance.

-Expected synergies from the ANZ P&I acquisition increase slightly
-Significant restructuring of the wealth management business expected
-Core business still experiencing earnings contraction

By Eva Brocklehurst

A protracted period has come to an end for wealth manager IOOF Holdings ((IFL)) as, after two years of negotiations, the acquisition of the ANZ P&I business has been completed. Annualised earnings are expected to be around $63m, including the loss-making former ANZ ADG business, and IOOF has increased its synergy target from the acquisition to $68m.

Synergies are slightly higher than Citi expected and remain considerable, being realised in full from July 2023. Still, the broker is cautious about the sustainability of earnings in the business, amid declining profit and ongoing material fund outflows.

Significant restructuring lies ahead for IOOF, as around 75% of its earnings are now from platforms. More will need to come from advice in future, the broker suggests. This will likely require capital but the company has not yet indicated the extent.

Synergies with the ANZ P&I acquisition are ahead of expectations. Moreover, Morgan Stanley suspects consensus has not factored in the full earnings uplift. Nevertheless, soft guidance for the first half is considered a reminder of the challenging regulatory and operating environment facing wealth managers.

First half underlying net profit is expected to be in the range of $61-63m, or $56-58m on a continuing operations basis. This is below most broker forecasts. The material step-down stems from lower coupon interest and a full half of the ANZ ADG losses, Macquarie points out, although this should be offset in the second half by the P&I acquisition.

The core business has been experiencing earnings contraction which the company blames on "gross margin re-set from both regulatory and competitive dynamics". Macquarie reduces FY20 and FY21 estimates for earnings per share by -8.1% and -1.6%, respectively, to reflect the first half update.

Credit Suisse expects the debate around the ANZ P&I acquisition will continue to run its course but acknowledges the completion of the acquisition, along with new management owning the original synergy targets, has now removed a major risk.

Additional details on earnings should provide more comfort over the next 12 months and the broker continues to envisage further upside for the stock. The drivers behind the update are difficult to assess without further detail, UBS asserts, but should be available at the first half results on February 18.

Still, while ANZ P&I appears to be performing in line with expectations, ongoing earnings growth constraints are likely, in the broker's view. The company has already guided to elevated margin pressure in FY20 and higher costs, so the latest update indicates this is ongoing.

FNArena's database has one Buy rating (Credit Suisse), three Hold and two Sell. The consensus target is $7.78, suggesting 3.8% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 4.0% and 5.1% respectively.

See also, Painful Adjustment For IOOF Still Looms on October 28, 2019.

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