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OnePath deal overshadows IOOF's solid first-half result

Emma Rapaport  |  20 Feb 2019Text size  Decrease  Increase  |  
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IOOF Holdings may have posted a 6 per cent rise in first-half profit but the result is overshadowed by uncertainty around its acquisition of ANZ’s pensions and investments business OnePath, says Morningstar.

IOOF (ASX: IFL) yesterday posted an underlying net profit of $100.1 million, up 6 per cent in the six months to 31 December 2018.

The result was underpinned by a jump in funds under management, administration and advice, which rose 10 per cent to $137.8 billion. This was helped by the acquisition of ANZ Wealth Management Aligned Dealer Group. The acquisition resulted in the transition of 661 ANZ Wealth advisers and $17.3 billion in funds under advice to IOOF. 

Underlying net profit after tax also included three months of OnePath's economic interest totalling $20 million - a business which IOOF is in the process of acquiring.

Under the terms of the proposed acquisition, IOOF made an initial payment of about $800 million to ANZ in October 2018 to subscribe for a debt note, with ANZ to pay a coupon rate of 14.4 per cent until the acquisition is complete.

Statutory profit came in at $135.4 million for the half year ended 31 December, compared with $45.2 million over the same period a year ago – a 200 per cent rise. This was boosted by one-off gains including the sale of the company's corporate trust business.

While underlying profit was positive, Morningstar equity analyst Chanaka Gunasekera says the result hides IOOF's true performance – a fall of almost 10 per cent.

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"The result includes underlying net profit which relates to the part completion of the ANZ pension and investment acquisition," he said.

"If you strip OnePath's economic interest from the result, IOOF's underlying profits fell 9.9 per cent."

Gunasekera says this is important for investors to keep in mind as IOOF's OnePath acquisition is far from complete. In fact, he believes the proposal is in jeopardy amid the fallout from the Hayne royal commission and APRA’s unprecedent actions against five members of IOOF’s key leadership team.

Uncertainty reigns over ANZ OnePath acquisition

ANZ Bank first announced its intention to sell OnePath to IOOF in October 2017. However, ANZ was forced to review the transition after IOOF copped flak at the Hayne inquiry. APRA disqualified three IOOF executives and two directors for allegedly failing to act in the best interests of super fund members.

IOOF now expects the OnePath deal to occur by 1 July.

Gunasekera believes there is a risk the ANZ pensions and investments trustee may not see the deal as being in the best interests of members, and therefore block the transaction.

Gunasekera said yesterday’s result underscores the importance of the deal's completion to IOOF's earnings.

IOOF acting chief executive Renato Mota insists IOOF will succeed in acquiring OnePath, saying "we are in constant and open dialogue with ANZ and are condiment that clients' best interests will be served by the transition".

A successor funds transfer would see ANZ's 700,000 super fund members transferred to IOOF.

Overall, Mota said the company delivered "a solid financial result" but was aware of the "challenges ahead to restore trust."

IOOF share price surge on unexpectedly good result

IOOF shares jumped 16.42 per cent Tuesday, their biggest intraday gain since 2011, compared to a broader market rise of 0.2 per cent.

At 11.30am on Wednesday, IOOF was down 0.30 per cent at $6.15. It has lost nearly 50 per cent in 12 months. The stock carries a Morningstar fair value estimate of $5.

Gunasekera attributed Tuesday’s share price jump to an increase in funds flowing to IOOF's superannuation platform business, and management's comments that the trend of investors moving away from retail super funds into industry funds has not affected them.

IOOF said it expected to spend $20 million to $30 million in new compliance costs to remedy issues raised by the Hayne inquiry.

Gunasekera has a very high uncertainty rating on the stock because of the threat of further court action from regulators, threats of a class action law suit, and regulations stemming from the banking royal commission.

IOOF may struggle to attract funds and advisers to the damaged brand. "With IOOF in a state of flux it's difficult to get visibility on the state of the business and earnings.”

IOOF will pay an interim dividend of 25.5 cents, fully franked, down from 27 cents a year ago.

Price Chart | IFL

IOOF Price Chart

IOOF Holdings | Feb 19, 2018 – Feb 18, 2019

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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