IOOF (IFL)

Fat Prophets

Friday 23rd May 2014

Fat Prophets

IOOF (IFL)

What’s new

IOOF is back on the acquisition trail, entering into a share implementation agreement with SFG Australia. The deal attributes a value of approximately $670 million for SFG Australia, the parent company of Shadforth Financial Group and other client facing brands.

Under the terms of the agreement, SFG Australia shareholders will receive 0.104 IOOF shares for each SFG Australia share they hold. IOOF will also make available a cash alternative, subject to a maximum cash component for the deal of $100 million. The Board of SFG Australia has unanimously recommended the deal to its shareholders, who are expected to vote on the proposed transaction at a shareholder meeting likely to be held in early August.

Outlook

Strategically, the deal makes a lot of sense in our view, as scale has become increasingly important in the domestic financial advice sector. The combination will form the nation’s third largest financial advice business measured by and one of the largest listed wealth management companies in Australia. The additional scale will allow IOOF to spread its technology and compliance costs across a broader revenue base.

SFG Australia has produced respectable growth in earnings over the past few years, and has built up a significant national footprint. The company’s 182 advisors provide financial counsel to a client base that consists mainly of high net worth and affluent customers, as well as small to medium enterprises.

Granted, it looks as though IOOF is paying a fairly full price, with the offer representing an implied multiple of circa 18 times FY2014 earnings estimates for SFG Australia. This is a premium to IOOF’s own forward earnings multiple and a higher price than it has paid for other acquisitions in recent years. However, market prospects and valuations have also risen over that period.

Furthermore, IOOF expects the proposed transaction to be 8 percent earnings-accretive in FY2016 on an underlying cash net profit basis, factoring in synergies in the region of $20 million per annum by FY2016. We are certainly inclined to back the management to achieve this, given its strong track record of acquisition integration over the years.

Price

Shares in IOOF have been relatively stagnant in recent times. However, the stock has been a strong performer over a longer timeframe, and has indeed appreciated over 50 percent over the past two years while rewarding shareholders with solid dividend streams along the way.

Worth Buying?

We find the wealth management space to be very attractive in Australia, with an aging population and mandated superannuation contribution schemes set to boost the market size considerably, even from its current elevated base. We see IOOF as perfectly leveraged to this thematic, with the investment case further supported by management’s proven track record of making and successfully integrating acquisitions.

However, the stock is currently trading on circa 16 times forward earnings estimates, with the market already cognisant of IOOF’s investment appeal. Consequently, we believe it is prudent for those without exposure to wait for a pull back in price before buying into shares of IOOF.

Greg Smith is the Head of Research at Fat Prophets.

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