IOOF Holdings Limited – Update on APRA’s Legal Proceedings, FY19 Financial Results and Road Ahead

IOOF Holdings Limited (ASX: IFL) provides services such as financial advice, platform management & administration, investment management and trustee services.

APRA Files Legal Proceedings against IOOF Executives: The company has recently been in the news with respect to the legal proceedings filed by the Australian Prudential Regulation Authority, against its superannuation funds. APRA in its filing to the federal court had stated that the executives of the company were not abiding by the superannuation law.

The regulator accused the executives of not acting in the best interests of retirement savers, also taking into loop the subsidiaries of the company for commitment of breaches. The allegations have targeted Chris Kelaher, the former CEO of IOOF Holdings Limited, George Vernados, former Chairman and other executives of the Group.

Consequences in the court came in as a failure of the regulatory authority to ban the executives from the superannuation industry, as suggested by the judgement of Justice Jayne Jagot. The filings by APRA came out to be systematically weak as per the judgement of the court.

Change in Shareholding: The company recently updated that it ceased to be a substantial shareholder for KYCKR Limited. The company’s voting power in Veris Limited went down from 13.761% to 12.597%. In another recent announcement, the company updated on cessation as a shareholder of PKS Holdings Limited.

Update on Sale of Ord Minnett: IFL recently announced that it has completed the sale of its holding in Ord Minnett Holdings Pty Ltd for a total consideration of $115 million. IOOF Holdings has a 70% stake in the company which has now been transferred to a consortium of private investors led by the current Ord Miinnett management. The key purpose underlying the transfer of stake was to align the company’s focus on the core wealth management capabilities.

Dividend Update: The company would pay a dividend of $0.1900 per ordinary share, (payment date being 27 September 2019).

Financial Results: During the year ended 30 June 2019, the company reported statutory NPAT amounting to $28.6 million, down 67.7% on prior corresponding period NPAT of $88.3 million. Statutory profit for the year includes remediation provision of $156.2 million after tax. Underlying NPAT for the year amounted to $198 million, up 3.4% in comparison to prior corresponding period value of $191.4 million. Total funds under management, administration and advice were reported at $149.5 million, rising 18.7% in comparison to prior corresponding period.

Underlying NPAT from continuing operations amounted to $184.9 million, representing an increase of 5.2% on prior corresponding period profit of $175.7 million. Profit from continuing operations excluded the impact of Ord Minnett that has been sold to a consortium of private equity investors. The profit also excluded the impact of the after-tax loss amounting to $16 million arising out of 9 months ownership of ANZ ALs.

FY19 dividend per share amounted to 44.5 cents, down 17.6% on prior corresponding period DPS of 54 cents. In the second half, IFL declared a dividend amounting to 19 cents, comprising 12 cents for final dividend to account for the impact of the provision for remediation on statutory NPAT and the balance 7 cents to reflect the economic performance of the business.

Gross margin for the period amounted to $499.2 million, up 1% on $496.5 million on prior corresponding period. Underlying EBITA for the period stood at $193.1 million, going down by 17% in comparison to pcp value of $233.7 million.

Business Highlights

Financial Advice:

  • The business segment reported revenue amounting to $388.4 million, as compared to prior corresponding period revenue of $320.6 million.
  • Gross margin for the period stood at $188.5 million, as compared to a gross margin of $196.3 million in pcp. The margin was adversely impacted during the year due to the adverse impact of repricing of third-party administrator revenue share.
  • The company reported a decrease in operating expenditure for the segment due to lower labour costs via corporate recharge.
  • Underlying NPAT for the segment stood at $58.2 million, as compared to $63.6 million in prior corresponding period.
  • During the year, the segment reported IOOF adviser net promoter score of +17% as compared to the industry average of -30%.

FY19 Highlights – Financial Advice (Source: Company Presentation)

Portfolio and Estate Administration

  • Revenue for the segment was reported at $414.6 million, down on prior corresponding period revenue of $420.7 million.
  • IFL reported significant organic growth in average FUAdmin counter to generally observed trend in retail platforms.
  • Underlying net profit after tax for the period amounted to $81.5 million, down on prior corresponding period value of $88.8 million.
  • Gross margin was reported at $234 million, declining slightly on prior corresponding period gross margin of $237.2 million.
  • The segment reported net inflows amounting to $1.4 billion during the year.
  • The period was also marked by re-launch of Pursuit Focus and expansion of ClientFirst operating model.
  • During the year, the company engaged in investments in IT to drive efficiencies and reduce the costs.

FY19 Highlights – Portfolio & Estate Administration (Source: Company Presentation)

Investment Management:

  • The investment management business reported revenue amounting to $102.7 million, up in comparison to prior corresponding period revenue of $73.4 million.
  • Gross margin for the year stood at $63.1 million, up from prior corresponding period value of $61.9 million. In percentage terms the margin remained flat in comparison to FY18 at 0.29%.
  • Underlying NPAT for the year amounted to $36 million, as compared to a profit of $36.7 million in prior corresponding period.
  • Operating expenditure for the year went down to $10.7 million from $11.4 million in pcp, resulting from reconfiguration following the retirement of the former CIO.

FY19 Highlights – Investment Management (Source: Company Presentation)

Ex-ANZ Wealth Management:

  • Revenue for the segment amounted to $152.2 million, with the second half contributing a large portion of revenue.
  • Gross margin for the segment stood at $12.5 million with gross margin percentage of 0.10%.
  • The company reported underlying net profit after tax amounting to $35.6 million for the segment, with second half UNPAT amounting to $20.6 million.
  • During the period, ANZ ALs were successfully transferred to IOOF with integration well underway.

FY19 Highlights – Ex-ANZ Wealth Management (Source: Company Presentation)

Acquisitions:

  • During the year, the company completed the acquisition of 100% shares of Ability One Pty Ltd, a financial and life planning advisory business based in Western Australia and South Australia.
  • The period also saw some legally binding arrangements between the company and New Zealand Banking Group Limited (ANZ). The arrangements comprised of full legal ownership of ANZ ADGs transferred to IOOF effective 1 October 2018.
  • The period was also marked by substantial economic completion of the ANZ P&I business through an initial payment of $800 million by IOOF to ANZ and payment of a coupon rate of 14.4% by ANZ to IOOF. Final acquisition of the P&I business is dependent upon the receipt of approval from OnePath Custodians and ANZ.

Divestments:

  • In November 2018, the company completed the divestment of the AET Corporate Trustee business. The business was sold to Sargon Capital Pty Ltd for a total consideration of $51.6 million.
  • In the month of June, the company divested its stake in Ord Minnett Holdings Pty Ltd for a total consideration of $115.0 million.

Outlook: Going forward, the business is expected to benefit from wealth management and the demand for simpler products and platforms. The business seems well positioned to deal with the challenges of the industry and the low growth environment. The business could grow under the umbrella of increasing demand for quality financial advice, particularly in context of an ageing population, the large retirement income systems of Australia and increasing per capital wealth.

FY20 Guidance: In FY20, the company is expecting governance investment expenditure to cost an additional amount of $10 million in FY20. Portfolio & Estate Administrations is expected to see a gross margin reduction of 5 basis points in FY20, including impact of Protecting Your Super amounting to $8 million and BT repricing of $12 million. Post-tax profit from divestment of Ord Minnett is expected to be around $83 million.

Stock Performance: The stock of the company generated returns of 34.85% and 26.25% over a period of 1 month and 3 months, respectively. The stock has a market capitalisation of $2.26 billion and price earnings ratio of 79.140x. After the close of the trade session on 27 September 2019, the stock quoted $6.470, up 0.31%.


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