IOOF Ltd (ASX: IFL) provides financial services including financial advice services via an extensive network of financial advisers and stockbrokers, portfolio management and administration for advisers, their clients and employers in Australia and investment management products. Its market capitalisation is $1.8 billion.
What is the FY19 result?
Today (Monday 26 August 2019), IOOF released its FY19 results. The main points are as follows:
- Underlying NPAT of $198.0 million, up 3.4 per cent on FY18.
- Statutory NPAT of $28.6 million, down 67.7 per cent, inclusive of provision for financial advice remediation.
- Underlying NPAT from continuing operations up 5.2 per cent to $184.9 million.
- Total funds under management, administration and advice (FUMA) $149.5 billion, up18.7 per cent in the year to 30 June 2019, mainly attributable to the acquisition of the ANZ Advice Licensees business.
- A final dividend of 19 cents per share (fully franked). This takes the total fully franked dividend for the year to 44.5 cents, compared with 54 cents in FY18.
The result addresses two important issues arising out of the banking royal commission:
- First, IOOF has conducted a comprehensive review of advice to clients. The review included the development of key risk indicators, a sampling of advisers and an external review of over 1,200 files. The review found incidences of fees for no service, inadequate documentation and inappropriate advice. In response, IOOF has provisioned for $182.7 million in remediation costs, inclusive of interest as well as$40.4 million in program costs.
- Second, IOOF indicated that it has met all of the APRA licence conditions that were required by 30 June 2019. APRA has imposed additional regulatory requirements on IOOF in the light of issues arising out of the banking royal commission.
On the positive side, IOOF continues to attract net inflows into its funds management business. This indicates that IOOF underlying business is stable notwithstanding the issues identified by the banking royal commission. In particular, IOOF says that:
Improving our governance framework and practices and strengthening our relationships with stakeholders has been fundamental to us stabilising the business, accelerating the necessary change and restoring trust.
What is the outlook?
IOOF did not provide any specific guidance on expected earnings in FY20. However, it notes that the industry is undergoing significant transformation and considers that there is a need and demand for quality financial advice. IOOF sees “market and competitive opportunities for its businesses” in the current market environment.
What is the market’s reaction?
Today (Monday 26 August) IOOF is trading at around A$4.80, down 7.6 per cent. This movement reflects the market’s reaction to the $182.7 million in remediation costs. The question is whether this is the total cost or are there more costs to emerge over the next 12 months or so.
IOOF trades at a P/E ratio of around 10 times earnings (based on FY19 earnings) and an annual dividend yield (based on FY19 dividends) of around 8-9 per cent (fully franked). However, it should be noted that the market is expecting IOOF’s underlying earnings and dividend payments to fall in FY20, suggesting that IOOF is not cheap as implied by the FY19 numbers.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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