IOOF ifl strategic entry point, page-30

Sorry, with regard to valuation I am saying I think your forecast earnings (the market forecast earnings) are the problem. If you think about the above your formula is really:

Current profit + synergies = higher profit

And then you are looking at the market multiple and saying that people are discounting these earnings due to "reputational contamination". What I am saying is that I think you need to adjust future earnings down not adjust the multiple. I agree with you that if this is just a "storm in a teacup" that will blow over without any actual ramifications on the business model and margins then the current valuation looks like a buy. Its possible the government will just move on an let the status quo continue but probability weighting this outcome I would say its unlikely. I think the royal commission has unearthed enough to be quite confident that there will be real reform out of this - reform that as I said is designed to reduce the margins to IOOF (because IOOF margins are from a policy standpoint friction on the superannuation system).

In terms of how would I do the "hard work" (to be honest I just don't have the time to devote to this otherwise I would help you out with it). One way I would do this would be to stress test how robust you think earnings are under likely future scenarios. For example by asking "What does the same block of business look like in 5 years assuming that current legislation is enforced going forward?" I think that is a decent assumption and exercise.

For the platform business:

If IOOF was forced to price the entire business like the most competitive front book pricing (BT Panorma for example) what would the "adjusted earnings" look like?

(I realise that this assumes Best Interest Duty legislation is effective or they managed to make changes to make it effective to ensure friction from superannuation was reduced).

For the advice business "adjusted profit" the questions would be:

If FOFA grandfathering were removed in FY18 what would be the impact on current earnings?
If every advice fee charged had to be approved by the client what would be the impact on current earnings?
If every client fee had to be paid by the client and not out of superannuation (i.e. issue and invoice and get client to pay it) what would be the impact on current earnings?

I think the above are all fair questions and the answers would let you know how robust the earnings actually are. The other points is that while "25% downgrade" sounds a lot you might find that there is a lot of operational leverage in these businesses such that if the above caused revenue to drop by 20% then earnings might drop by much more.