Yes, it is hard work trying to discern what the new world order will look like.
(Heck, absent the incident for which IOOF appeared before the Royal Commission - which to my mind was somewhat immaterial in quantum - I struggle to obtain answers from anyone to my question of "What is the most serious offence/transgressions/breaches committed by IOOF?")
And trying to figure out what meaningful impacts any change in legislation (or, rather, more robust application of existing legislation) will have on IOOF's future levels of profitability is very hard to work out.
In an earlier post you stated that "the market is still pricing in growth and sustainability of margins which in my mind is much less likely".
However, unlike you, I see the prospective valuation multiples - based on current earnings forecasts - pricing in quite a lot of reduction in earnings:
Current Market Cap = $2.8bn
FY2018 Earnings = $190m
Acquired Earnings (ANZ Wealth) = $65m (excl. any synergies, $100m assuming only 50% of synergies are achieved)
=> Prospective Pro Forma Earnings = $290m (assuming just 50% synergy achievement)
[And that assumes zero FUMAS growth due to flow or market movement.]
So, Prospective P/E = 9.7x
Now, historically, stocks in the wealth management sector traded at valuation multiples in the mid- to high teens.
But I accept your point that the "reputational contamination" is likely to induce a de-rating of those valuation multiples, even once the Royal Commission "dust" has settled.
You say that IOOF should trade at a multiple on a par with the major banks. I think that is a stretch for a number of reasons, but the main ones being that, the acute leverage of the banks makes them far more financially risky, combined with their challenged earnings outlook to to contraction in housing credit which has commenced.
But even if, for the sake of conservatism, we apply a bank-like P/E multiple (say, 12.5x to 13.5x) to IOOF then, compared to IOOF's current sub-10x prospective multiple, it implies a reduction requirement of some 25% to 30% from current consensus figures.
So, at current valuation levels, the stock is certain not pricing in business-as-usual for the company. Quite the opposite.
The tricky part is knowing whether 25% downgrades are actually on the cards.
And that's the part with which I - as an owner of this company - am struggling.
IFL Price at posting:
$8.12 Sentiment: Buy Disclosure: Held
(20min delay)
