In an investment research report issued on Wednesday, research house Morningstar offered an analysis of IOOF’s standing as an ASX retail investment opportunity, pointing out a number of strengths in the company’s business models as well as potential risks.
“IOOF Holdings’ core businesses of investment and superannuation administration, product structuring, asset management and financial advice benefit from durable competitive advantages,” the report states, pointing to the system of compulsory superannuation contributions, as well as inherent advantages of vertically integrated business models.
“An integrated business model allows the firm to clip the ticket multiple times, at the adviser, the platform and fund manager level. This provides an advantage in the manufacture and distribution of products, crucial when competing for fund flows,” the report adds, predicting more broadly that the vertically integrated wealth management industry has “excellent long-term growth prospects”.
IOOF’s appetite for mergers and acquisitions – having taken over Skandia, DKN and Plan B in recent years and expressing its intention to acquire SFG Australia – is a major contributor to achieving this competitive advantage, the report states, adding that Morningstar’s analysts “expect [the SFG deal] to be approved”.
However, it also adds that “while merger and acquisition activity has been a growth catalyst, overpayment and integration risk persist” for IOOF Holdings.
“IOOF has been a beneficiary of the consolidation of the wealth management industry in Australia, which has seen it purchase Plan B and DKN, strengthening the company’s distribution footprint,” the report states.
“Further acquisitions are likely, and while presenting opportunities to realise significant cost synergies, risks of overpayment and acquisition indigestion are ongoing.”
In addition, the company faces risks stemming from “unfavourable regulatory changes, weak equity markets, poor investment performance, net outflows in funds under management and advice, and pressure on platform fees”.
In particular, Morningstar’s report suggests IOOF’s “underperformance” in terms of share price – relative to ASX wealth management peers – is largely attributable to “uncertainty around shrinking platform management fees” as well as “underperformance of its investment management business”, singling out aligned fund manager Perennial Investment Partners.
