IOOF Holdings has been putting runs on the board since our last update in IOOF flags flat profits on 18 May 16 (Buy – $8.48), helping its share price recover some ground.
Last month it reported that it had successfully completed the transfer of $7.1bn in funds under administration from The Portfolio Service platform to its flagship retail platform IOOF Pursuit. This reduces its number of platforms from three to two and demonstrates the consolidation IOOF provides. Ultimately, it should provide efficiencies IOOF can share between its customers and itself (probably mostly the former).
Consolidates platforms from three to two
Fund inflow of $500m in June quarter
Result due on 9 August
On top of this, IOOF yesterday reported net inflows of $500m in funds under management, administration and advice (FUMA) for the June quarter. Being the end of the financial year, this tends to be a strong quarter, and in 2016 it actually lagged the inflows of $1.9bn achieved in the June quarter of 2015. That’s probably being a little picky, though, and any inflow is a decent result given the negative sentiment towards the stock.
Advice continued its recent strong performance (notably from Shadforth and Ord Minnett) with an inflow of $339m and Platforms gained $312m. Investment Management, however, suffered an outflow of $150m. This was due in part to a large ‘one-off’ friendly society benefit payment, but it perhaps suggests that the disposal of the Perennial Growth and Fixed Interest businesses last year hasn’t fixed this division. The Trustee division's funds under supervision (FUS) fell 8% to $27bn, but given its measly underlying net profit margin of just 0.02% of (FUS), the profit impact will be insignificant.
For the year FUMA saw an inflow of $1.8bn, but this was offset by $2.4bn of market and other movements, so that FUMA ended June at $104.1bn, slightly lower than the $104.7bn a year ago.
None of this is likely to have a major profit impact in 2016, or 2017 for that matter, but it steadies the ship a little. Without some corporate activity, IOOF will no doubt struggle to increase earnings over the next few years. However, as we’ve noted before, some corporate activity is likely and it should help the company take advantage of favourable long-term industry trends (primarily superannuation flows). And with a free cash flow yield of almost 6%, it doesn’t need much growth to deliver an acceptable return. That cash flow is currently supporting a fully franked dividend yield of a similar amount – but the company may choose to reduce its dividend slightly to provide more firepower for acquisitions.
We’ll have more to say after the final result, due on 9 August. In the meantime, with the stock edging just past our $9 downgrade price we’ll stick with our Buy recommendation for now, but will downgrade if it settles much higher. BUY.
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