1) The preservation of Group Net Operating Margin (0.23% pre-tax on average FUMA, unchanged vis-a-vis FY2017), driven by a 300bp improvement in the Cost to Income Ratio, looks like a remarkable achievement to me in the current environment. To put things into context, IOOF have managed to keep their NOM essentially unchanged since the acquisition of Shadforths in 2014, despite an aggregate compression in Gross Margin to the tune of -12%.
2) Management’s comment about the revenue impact from the abolishment of grandfathered commissions “not expected to be material” (slide 18 in the Investor Presentation) removes a significant source of uncertainty. While the non-materiality of the impact is not a total surprise, its exact extent was difficult to quantify accurately from publicly available information.
3) EPS guidance (inclusive of the expected impact from the integration of ANZWM, but before market growth and net organic inflows as I understand, see slide 19) corresponds to 60c (FY2019), 69c (FY2020) and 83c (FY2021), which puts the stock on a PE of 15.0 (FY2019), 13.0 (FY2020) and 10.8 (FY2021) respectively.
Assuming an exit PE of 15 in FY2021, this guidance implies a CAGR of 11.5% pa from capital appreciation; adding a 6.0% pa dividend yield, that gives a total shareholder return of 17.5% pa on a three-year horizon (before markets and net inflows), which looks like a pretty attractive yield proposition to me on a risk-adjusted basis.
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