IOOF Holdings has 'warned' that lower average market levels this financial year will lead to lower funds under management, administration and advice (FUMA), and that this will leave underlying net profit broadly flat, at $173m–176m compared to $174m last year. That'll probably lead to earnings per share falling 2–3% due to the higher number of average shares on issue (shares were issued to buy Shadforth in August 2014, a month into last financial year). None of this should really come as a surprise, but it appears the market was still expecting earnings per share to be flat and has therefore made its traditional knee-jerk reaction to a profit warning, which is to knock the share price down by the amount of the downgrade (a touch more in fact).
We'd say, though, that 2–3% lower earnings doesn't knock 2–3% off the company's valuation. Apart from anything else markets have recovered over the past few months, so that all things being equal FUMA – the base from which IOOF makes its money – should be higher now than its average level for the 2016 financial year. For valuation purposes it's the future profits that count, which renders this warning largely irrelevant. We love to see such irrationality on display, though, and in this case it keeps the stock – which had been flirting with a downgrade to Hold – firmly in our Buy range. BUY.
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