Ann: ANZ Wealth Management updated financial information, page-71

When it comes to valuation, one way of looking at a possible split-up scenario is by doing a sum-of-parts valuation, under the assumption that the financial advice business is indeed spun off.

Beside one-off costs, the main difference is that the new financial advice entity will have a higher cost-to-income ratio, and thus a lower UNPAT margin (everything else being the same), than IFL currently has.

For instance, if we take as a reference the latest financial results of Shadforth pre-merger (Feb 2014), the old SFW had an UNPAT margin of around 25%, as opposed to the current 30% ca of the Financial Advice and Distribution division of IOOF (see for instance 2017 Annual Report).

Because the Financial Advice and Distribution division currently generates annual Net Operating Revenue of ~260m$, the implied UNPAT post-demerger would be 260m$ * 25% = 65m$; applying a PE multiple of 15x, the fair value of the demerged advice entity would then be 65m$ * 15 = 975m$.

Then we have the remaining divisions of IOOF (Platforms, Investment Management and Trustees) currently generating ~300m$ in annual Net Operating Revenue, with an UNPAT margin (net of corporate/admin costs) of around 30%. The implied UNPAT post-demerger would be 300m$ * 30% = 90m$; applying a PE multiple of 15x, the fair value of the demerged non-advice entity would then be 90m$ * 15 = 1,350m$.

Finally, there is the contribution from the ANZWM business, which (as a whole, i.e. before separating the advice component) is generating annual revenue of around 370m$. Assuming (conservatively, as it is the lower of the previous two) a flat post-restructuring UNPAT margin of 25% for the aggregate of this business, the implied UNPAT post-demerger would be 370m$ * 25% = 92.5m$; applying a PE multiple of 15x, the fair value of the demerged advice entity would then be 92.5m$ * 15 = 1,387m$.

Adding it all together, the total Enterprise Value of the two demerged entities would be 975m$ + 1,350m$ + 1,387m$ = 3,712m$; subtracting 455m$ of future debt funding (for the ANZWM acquisition) that gives an implied total value of 3,712m$ - 455m$ = 3,257m$.

On a total of 352m shares, that is equivalent to 9.25$/share.

Therefore, my conclusion from this purely illustrative exercise is that the market is essentially already fully pricing in both the possibility of a separation of the advice business and the introduction of the 3% fee caps, which as previously discussed should entail (if passed) a further EPS erosion to the tune of 2%-3%.