IOOF: Result 2015
Recommendation
IOOF reported a patchy final result on Friday, as well as the findings of the PwC compliance review.
PwC were commissioned in response to recent media allegations to examine IOOF's regulatory breach reporting policy and procedures, and the 'control environment' within its Research division.
The good news is that the report found no major problems. Better still, it noted various steps that had been taken before the allegations blew up – such as the outsourcing of research for managed funds and equities – and that this had already improved things.
Key Points
Strong result from Advice
Margin squeeze in Platforms
No major problems in PwC report
Nevertheless, PwC has suggested a number of process improvements, around things like the composition of governance committees, 'strengthening team separation where there are heightened risks of conflict' and adopting a uniform set of standards and procedures for breach reporting.
IOOF has accepted all the findings and invited PwC to come back in six months to report on progress in implementing the changes. IOOF also said it would pass the report on to to ASIC and APRA, and the concern for shareholders now is that those authorities will take quite an interest in IOOF's ongoing compliance arrangements.
Advice the star
The financial advice and distribution (FAD) division was the star of the result, supported by the recently acquired SFG Australia – aka Shadforth Financial Group. FAD increased its average funds under advice (FUA) by 8% to $34.2bn, but a slight increase in net fees earned as a percentage of FUA, from 0.23% to 0.24%, meant that net fees (the 'gross margin') rose 14% to $82.2m. Flat operating costs magnified the increase to give a 39% rise in net profit to $25.1m.
Year to Jun | 2015 | 2014 | /(–) (–) |
---|---|---|---|
Gross margin ($m) | 556.4 | 389.6 | 43 |
Other revenue ($m) | 38.3 | 36.8 | 4 |
Total revenue ($m) | 594.7 | 426.4 | 39 |
Operating profit ($m) | 246.6 | 170.5 | 45 |
U'lying net profit ($m) | 173.8 | 123.0 | 41 |
U'lying EPS (c) | 59.9 | 53.1 | 13 |
DPS (c) | 53.0 | 47.5 | 12 |
Final dividend | 28c, fully franked, ex date 22 Sep |
Shadforth, for its part, delivered a 21% rise in underlying net profit. Combined with $13m in pre-tax cost savings, this enhanced IOOF's 2015 earnings per share by 6% to 59.9 cents. Shadforth's adviser numbers are stable, clients, apparently, are 'engaged', and the purchase is still set to deliver pre-tax cost savings of $20m.
Platform administration went the other way, with an 11% rise in average funds under administration (FUA), from $30.6bn to $33.9bn, resulting in only a 5% rise in operating profit. Management pointed out that the lower margins were not just to do with competition, but a result of newer products being efficient, so that fees should be expected to fall without the same necessarily being felt in the operating margin.
There's something in this, with operating profit (pre-tax) as a percentage of funds under administration dipping only 1 basis point from 0.37% to 0.36% over the past three years, while the gross margin has fallen from 0.72% to 0.66%. The theory didn't help much in 2015, though, with a 2 basis point fall in the gross margin from 0.68% to 0.66% being fully replicated at the operating line, with a fall from 0.38% to 0.36%.
The reality is that platform management is becoming more competitive, but it's also growing steadily and remains highly cash generative and you can't have everything – at least not for a 6% fully franked dividend yield. It also shows the sense in IOOF's diversified approach – the more so following the SFG acquisition, with only 42% of underlying profits coming from platform administration in 2015, compared to 56% in 2014.
The stock is down slightly since Media storm hits IOOF on 22 Jun 15 (Buy – $9.17) and up slightly since we cut the Buy price to $9 on 25 Aug 15 (Buy – $8.65). Given the patchy result we're going to stick with that lower Buy price. BUY.