IOOF (IFL) Time to Buy

In my opinion the time has now arrived to buy IOOF.

The next few weeks could well sell further extreme volatility from a number of factors: fear, forced margin call selling, short sellers ramping up short positions into a market that is already fearful etc.  Therefore I would suggest not buying your full required position in one purchase.  For myself I acquired 50% of my desired position today.  I will then add to this over the next couple of weeks depending on price movement.

There is alot of chatter that IOOF is the same as Freedom Insurance (and look how that turned out for those purchasing on dips!!!).  I strongly disagree.  Freedom Insurance was essentially a 'boiler room' operation with a good marketing department that branded the operations as 'affordable insurance'.  The products sold through Freedom Insurance might have been affordable but they were pretty useless when a claim needed to be made against it.

In my opinion the issues facing IOOF can be repaired.  In a nut shell, the underlying issue is one of not following up with agreed compliance, and a required change in corporate behavior.

Todays warning shot by APRA has been well and truly heard.  The tanking of the share price will force the boards hand.

In the short term, profits will be hit through increased compliance costs, legals and a potential class action thats sure to arise in the coming weaks or months.

However the underlying nature of there business will still be in tact.  IOOF serves a real need, and with the effect of the Royal Commission, the reality is that future competitive industry pressure will lesson.  History tells us that as industry competition reduces, margins go up.

Next Debt:

IOOF has no or negligible debt.  Therefore this is low liquidation/administration risk.

Next Earnings:

IFL has a BV of $5.14.  Cyclical average ROE is rangebound between 10-15%.  This is a very good ROE, given there is no debt distorting the "R".

On a 10% RRR this gives a fair value between $5- $8 (rough numbers), on a simple measure.  If we used future compounded returns, the fair value increases further.  I just use a simple measure, taking comfort that the so long as the company has increasing profit and book value over time, the future compounded fair value is just additional icing on the cake.

Near term earnings are at risk, but over time the issues facing IFL will pass, earnings will be restored, the share market will again re-rate upwards the stock.

I anticipate very attractive total returns 5 years from now based on a current price of $4.60 odd.

I am buying whilst the market is fearful and there is blood on the streets.