IOOF sells corporate trust business

IOOF Holdings has been under fire following chief executive Chris Kelaher's appearance at the Royal Commission a month ago, sending its share price down 10% since our update on its final result. But behind the scenes it's been getting on with business, negotiating the sale of a non-core corporate trustee business for $52m.

The business contributed a mere $1m to underlying net profit in the past financial year - out of a total for the Trustee division of $9m and the group total of $81m - so it was never likely to make a big impact. The sale should also allow IOOF to focus on its private trustee business, which fits much better with its other retail wealth management businesses. Completion is expected by the end of October and, on the face of it, 52 times earnings also looks like an excellent price.

As we discussed in our podcast yesterday, IOOF has created problems for itself with its antagonistic  performance at the Royal Commission - even though any transgressions it may have committed are a far cry from those of others in the industry. However, the outcry over the Royal Commission has reached a level where extreme outcomes can't be ruled out. The most serious would be any disruption of the acquisition of ANZ Wealth Management or a ban on vertical integration, which could force companies like IOOF to split off its various business, thereby reducing the value of the whole.

The Government needs to tread carefully, though, because somehow we need to get good wealth products and advice to people, and we need to persuade them to pay a fair price for it. In this respect, we believe IOOF may be part of the solution, by continuing to improve functionality and drive down costs on its platforms and enabling its advisers to use a range of platforms (not just IOOF's) and further their education at the IOOF Advice Academy.

Consensus estimates are for underlying earnings per share of around 75 cents by 2020, the first full year after the ANZ acquisition (which management expects to add 20% to earnings by 2021). The current price represents a multiple of only 10.5 times that, which discounts a lot of bad news, particularly since the earnings arrive predominantly in cash and enable a generous dividend payout ratio. We're increasing both our recommended business risk and share price risk to Medium-High from Medium to take account of the potential changes to the business and industry structure. In any case, we recommend you take advantage of the market's current pessimism and BUY.

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