What's new One of the largest independent financial service companies in Australia, IOOF, has bulked up in recent years and we view it as offering both sides of the merger-and-acquisition (M&A) story.
The company has a strong balance sheet, lean cost profile and a track record of extracting value from its acquisitions by taking out significant costs and smoothly integrating them into the group.
The company recently added to the stable, buying vertically integrated wealth management provider Plan B.
Plan B, which has its own in-house platform and funds management and advice business, looks like a good deal, given the cost savings the purchase will deliver the expanded company.
IOOF paid around 11 times trailing earnings, which is a reasonable price.
Meanwhile, IOOF's existing businesses are tracking well. Funds under management, administration and supervision (FUMAS) increased 3.2 per cent to $110.8 billion last quarter. Underpinning recent gains have been the strength in equity markets and positive inflows on the company's flagship platforms, along with the previous acquisition of another company, DKN.
The addition of Avenue Capital into the fold also brought $479 million into funds under administration, and offset outflows in investment management. The company has about 30 financial advisers based in NSW.
Outlook The Plan B match makes sense, and is a strategic fit between two complementary businesses. The acquisition will add to IOOF's growing army of aligned advisers, and increases the presence in the growing New Zealand retirement savings market. At home, it boosts IOOF's presence in the growing economies of Western Australia and Queensland.
Earnings next year should get a slight boost, and grow by around 4 per cent from 2014 as a result, while FUMAS will rise around 2 per cent.
IOOF clearly has an excellent track record of acquiring and consolidating businesses effectively and maintaining a lean cost profile. We continue to think the industry will remain in consolidation mode and IOOF will be on safari for smaller acquisitions at the right price.
On the flip side, IOOF itself could be a nice morsel for one of the whales in the Australian financial industry who would scarcely be interested in smaller transactions.
Price Demand for IOOF shares this year has matched its own appetite for acquisitions, with the stock up around 33 per cent in 2012.
Recent enthusiasm, however, suggests that positive sentiment is growing, which is understandable given the growth story unfolding.
Worth Buying? There are several things we find appealing in IOOF — its operating leverage to an improvement in financial markets, relatively lean cost profile, mergers and acquisition potential, and a vertically integrated business model that stands it in good stead to deal with any regulatory changes.
With the stock trading below its historical average on cyclically depressed earnings, there is much scope for earnings growth. Any future increases in superannuation contributions would also provide another shot in the arm here. IOOF's handy 6 per cent dividend yield provides another attraction.
Greg Smith is head of research at Fat Prophets sharemarket research.