IOOF: Interim result 2017

The funds are flowing in for IOOF, but its interim result shows how much it's struggling to turn that into profit.

The fee margin in the Platform business fell to 0.58% in the six months to December, from 0.62% in the previous half and 0.65% in the one before that. That would be fine if customers were simply migrating to cheaper, more efficient platforms, because it should push operating costs down. But these were broadly flat, resulting in a net operating margin of 0.30%, down from 0.32% in the previous half and 0.37% in the one before that.

The Advice business saw something similar, with the fee margin falling to 0.43% from 0.46% in both the previous two halves, and costs actually rising. These were affected by a redistribution of corporate charges following the Perennial disposals in the prior year, but nevertheless meant a fall in the net operating margin to 0.21%, from 0.23% in the previous half and 0.24% in the one before that.

The immediate financial impact of these margin pressures is that underlying net profit and earnings per share each undershot consensus estimates by about 6%, falling 17% from the first half of FY16, to $79.4m and 26.5 cents respectively.

Of course margin pressure has been a feature of this industry for a while, but we were nevertheless shocked by the extent of it shown in this result. So it seems was the market, which has knocked the share price down by almost 10%.

The big question, of course, is to what extent this points the way for the future. Falling margins are to some extent already reflected in the share price, which is why it's on a price-earnings ratio of about 16 (based on new expectations for about 54 cent in EPS for 2017). That's despite some favourable industry tailwinds – at least in the form of fund flows from mandated superannuation.

We're meeting with management on Friday and will have more to say after that. For the time being, though, we're reducing our Buy price to $8 and our Sell price to $12. We're also nudging down our recommended maximum portfolio weighting from 7% to 6%. HOLD.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in IOOF Holdings. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.