Analysts back IOOF’s move on MLC
Concerns remain over whether the Melbourne-based IOOF could be taking on more than it can digest.
IOOF’s $1.44bn move to scoop up NAB’s MLC wealth business has been backed by investors, but concerns remain over whether the Melbourne-based IOOF could be taking on more than it can digest.
IOOF this week struck a deal with NAB to acquire the MLC wealth division in a move that will result in its adviser numbers swelling to just shy of 1900 and its funds under management jumping to more than $500bn.
Following the acquisition, which is expected to be completed by June 30 next year and is subject to several conditions including regulatory approvals from financial regulator APRA and competition watchdog ACCC, IOOF will be the largest retail wealth manager in the nation and the second-largest superannuation provider.
Analysts at Morgan Stanley said the deal had compelling synergies but also execution risks, and cautioned that IOOF would need to turn around MLC’s outflows.
“IOOF has a strong track record of prior merger integrations, they said, but added it was “still integrating” the acquisition of ANZ’s Wealth Pensions and Investments business. “Those synergies are on track, though pace seems to have slowed on COVID. Simultaneously integrating MLC presents some execution risks,” the analysts told clients.
MLC has lost market share over the past 10 years as low-cost competitors threaten its position.
“In the 12 months to March it has seen outflows of around 5 per cent of assets under management in super and platforms and around 7.5 per cent in portfolio management,” the Morgan Stanley analysts said. “The outflows are larger than IOOF’s, and have come despite repricing key products.”
Credit Suisse analysts have slashed their 2022 earnings forecast by 7 per cent as a result of the deal, as they expect it to be more dilutive in its early years before synergies flow through. They also cautioned that IOOF’s share price could be in for a rough ride in the coming months.
“IOOF’s share price will likely see near-term volatility as the shares on issue increase significantly and debate continues on the merit of the acquisition, beyond some synergy-driven and debt-funded accretion,” they told clients. “We are of the view that we have conservatively set our target price, allowing for platform margin compression, outflows and incorporating the one-off spend in coming years.”
Following IOOF’s full-year result and news of the acquisition, Credit Suisse has cut its target price to $5, from $5.50, and retained its outperform rating on the stock. IOOF shares are in a trading halt as it undertakes a $1bn institutional raising. The stock last traded at $4.63.
JPMorgan analyst Siddharth Parameswaran also flagged execution risks, but was also concerned about regulators shooting down the deal.
He said the ACCC had “previously stopped AXA-MLC, although that was a long time ago”.
“There are also risks in targeting synergies on both the ANZ and MLC business together that may leave problems down the line if there are any short cuts taken,” he told clients.
Mr Parameswaran questioned the value of IOOF’s acquisition of ANZ’s wealth arm to date.
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