IOOF: Interim result 2018

When you're leading the charge to consolidate a competitive industry, pressure on revenues is a fact of life – you just hope you can innovate and reduce costs fast enough to keep ahead. It's a tough gig, but someone has to do it and IOOF's latest interim result again showed that it is one of the best.

The revenue pressure was most severe in its Platform division, where a large number of customers were switched in 2016 from The Portfolio Service to IOOF's flagship Pursuit platform. Pursuit offers various cheaper options, which customers are increasingly selecting, and rising asset prices have pushed some customers into lower-margin fee tiers.

This pushed the gross fee margin down to 0.56% of average funds under administration (FUA), sharply down from the 0.60% in the second half of 2017 and lower even than the 0.58% figure in the disappointing first half of 2017.

Costs down

Pursuit, though, is also cheaper for IOOF to run and those savings are now flowing through. IT expenses also reduced due to the completion of a number of projects to improve the user experience and the transfer of external consultants to internal employees.

In all, Platform expenses fell 9% compared to the first half of 2017 and 2% compared to the second half. As a result, the net operating margin was 0.32%, slightly above the 0.30% for the first half of 2017, but below the 0.34% for the second half.

It was a similar story in the Advice business, where the gross fee margin ticked down from 0.43% a year ago, to 0.41% six months ago and 0.39% in this result. But the net operating margin was flat on a year ago at 0.21%. Management explained that the reduced gross margin reflected the departure of some advisers whose fees were included in the revenue line but who didn't have any funds under advice.

The Investment Management division bucked the trend by reporting a slight increase in gross margin from a year ago, from 0.28% to 0.29%. The main reason for this, however, was lower external investment management fees, so it's hardly a sign of less margin pressure in the industry. Lower costs also helped the net operating margin to rise from 0.21% to 0.23%.

The other part of the jigsaw is the funds under management, advice and administration (FUMA) on which margins are earned and here the news continues to be positive. $617m flowed into the Platform business in the half, while $1,208m flowed into Advice, to give a total inflow of $1,564m even with a $261m outflow from the Investment Management business. Combined with strong markets, FUMA rose 5% over the half to $120bn.

Management has positioned IOOF to be attractive to quality advisers under the new ‘best advice' rules, with its Advice Academy and ‘open architecture', which enables advisers to use other platforms as well as its own. The numbers suggest the strategy is working.

Dreaming big

Perhaps more important than any of this, though, was an update on the acquisition of ANZ Wealth Management. The deal is still on track to complete in October and chief executive Chris Kelaher clearly can't wait to get his hands on the business, describing it as a ‘perfect match' and ‘very, very exciting', and saying he couldn't ‘dream of something any better' (evidently he's very committed to his work).

The business is currently performing in line with expectations, which means it should have grown since the contract was signed in October, in line with market movements. So management is hoping to ‘buy even a bigger business' by the time of completion in December. Either way, though, chief financial officer David Coulter explained that the price paid included a considerable margin of safety:

‘For a near-$50 billion administration business and a bigger investment management business than ours … it's priced at less than $1 billion where we were trading on a market cap of $3.5 billion at the time that we made the acquisition. So granted we have a small trustee business and a bigger advice complement, but the big gap there tells you that this transaction was priced adequately to account for any diminution in business experience in the completion period.'

As things stand, IOOF expects the deal to add to earnings from 2019 and to improve its business over time, by delivering scale as much as anything else. We're happy to back management's track record in completing acquisitions and delivering the benefits. The stock is hovering a little above our Buy price and we continue to recommend that you HOLD.

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