IOOF is set to become one of the largest wealth managers in Australia as it acquires the MLC business from National Australia Bank.
-Is the transaction too big and too risky for IOOF?
-Is the acquisition really 20% accretive?
-Volatility in the share price likely
The purchase of MLC Wealth will make IOOF Holdings ((IFL)) one of the largest wealth managers in Australia, adding scale and providing extra capability such as corporate superannuation. IOOF will acquire the business from National Australia Bank ((NAB)) for $1.44bn, to be funded 72% by equity, and 28% by debt.
This is a long-dated deal with approval likely to take up to 10 months and full integration a further three years. The company anticipates 50% of the $150m in synergies will come in the first full year.
However, Morgan Stanley points out MLC has lost market share for the past decade, and experienced outflows in the 12 months to March 2020, at around -5% of assets under management in superannuation & platforms and around -7.5% in portfolio management. This is despite the re-pricing of key products.
Importantly, the broker believes IOOF needs to reduce the outflows in MLC to hold onto the potential 20% accretion it anticipates into FY23. IOOF would also be integrating the ANZ OnePath and MLC deals at the same time.
Bell Potter considers the transaction "too risky, too big and too complicated" for IOOF in its current state, as MLC revenue margins have been trending down along with the sector. The requirement to reinvest, coupled with compliance concerns, is likely to limit the synergies on offer and the timing of gains.
Moreover, the broker argues the deal is dilutive compared with the guided headline rate of 20% accretion to earnings per share. The broker asserts this figure assumes the deal is completed on July 1, 2020 and that a significant portion of synergies flow through in the first year.
Yet the acquisition will not be completed until the end of FY21 and this throws some variables into the mix. Bell Potter forecasts lower synergies because of the lack of disclosure on how the $150m will be achieved, amid the need to invest in old technologies.
Ord Minnett upgrades to Buy from Hold, although has some reservations about the deal and the price and this concern centres on whether all synergy targets can be achieved. Nevertheless the broker's Buy rating is underpinned by a belief that consensus estimates for FY21 are understated compared with long-term metrics as well as the raising of equity ahead of completion of the purchase.
Moreover, comparisons with other diversified financial stocks are favourable and, even if some advisers leave MLC, Ord Minnett suggests the attrition risk can be contained. The company's acquisition of both OnePath and now MLC have also, arguably, been completed in the wake of up-to-date approaches to governance and compliance.
The broker also suggests dealer groups are starting to increase their fees to try and avoid losses, which should benefit IOOF's market-leading position in advice.
Balance Sheet Concerns
Bell Potter envisages problems with the balance sheet, as current drawn debt of $460m will increase to include $250m in additional debt and $200m in a notes facility with National Australia Bank.
The broker lists over $700m in abnormal expenses to pay over the years ahead, including $270m in remediation, $360m for the MLC integration and the remaining $60m for the OnePath integration, with no additional detail provided on how funding will occur. Unsurprisingly, Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Sell rating with a $3.40 target.
Credit Suisse downgrades FY21 estimates for earnings per share by -40% to account for the equity raising and highlights the mismatch between the timing of the current raising and the closure of the deal towards the end of FY21.
The broker expects volatility in the share price as the shares on issue will increase significantly and debate will continue around the merits of the acquisition. The database has two Buy ratings and two Hold for IOOF. The consensus target is $4.66, suggesting 25.3% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 6.5%.
National Australia Bank
On the other side of the ledger, brokers consider the deal an incremental positive for NAB, as it strengthens the bank's capital position and improves returns. CLSA described the transaction as a "clean exit" for the bank, which is expected to deliver around 30 basis points in capital benefit and place its CET1 ratio at the upper end of peers.
UBS considers the exit welcome news, as wealth management has been troublesome for some years and did not deliver the expected returns. NAB will now have sufficient capital, in the brokers' view, along with its capital raising in April, to absorb the expected increase in provisioning.
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