syrup & others, here is a report on AUW from Aspect Huntley: *...

syrup & others, here is a report on AUW from Aspect Huntley:

* We see the underperformance as the exit of the corporate premium for transformational transactions GPG might have engineered. In the end GPG didn’t set up a takeover or merger to sell its stake: it quietly sold all its 109.7m shares in an institutional placement. We were disappointed too and agree the corporate premium had to exit the share price.

* However, the underperformance is starting to become excessive given the strength of the market and the fundamentals in the superannuation industry. It can only be a matter of time before the market focuses on AUW’s earnings growth and resumes marking the stock higher in line with its sector.

* After GPG sold out is said: ‘Following completion of the merger between AWM and Select and the release of AWM’s 2007 half year results, we believe that it is an appropriate time for GPG to divest its shareholding and reinvest the proceeds in investment opportunities where GPG can be more actively involved in enhancing value.’

* This is consistent with GPG’s investment philosophy, which emphasises internal agitation for change. GPG is rarely a passive owner of sub-influential stakes. We expect a good second-half result from AUW given its highly favourable operating environment and the strength of the interim result.

* Subscribers should focus on the superannuation industry’s strong fundamentals.


Recommendation Impact:
(Last Updated: 20/07/2007)
In case the rerating comes sooner rather than later our recommendation is Buy.

Event Analysis:
GPG exit leaves AUW overlooked

AUW shares have substantially underperformed other superannuation-related stocks and the market since foundation shareholder GPG sold its 19.4% stake on April 18. We see the underperformance as the exit of the corporate premium for transformational transactions GPG might have engineered. In the end GPG didn’t set up a takeover or merger to sell its stake: it quietly sold all its 109.7m shares in an institutional placement. We were disappointed too and agree the corporate premium had to exit the share price.

However, the underperformance is starting to become excessive given the strength of the market and the fundamentals in the superannuation industry. It can only be a matter of time before the market focuses on AUW’s earnings growth and resumes marking the stock higher in line with its sector. In case this rerating comes sooner rather than later our recommendation is Buy.

After GPG sold out is said: ‘Following completion of the merger between AWM and Select and the release of AWM’s 2007 half year results, we believe that it is an appropriate time for GPG to divest its shareholding and reinvest the proceeds in investment opportunities where GPG can be more actively involved in enhancing value.’

This is consistent with GPG’s investment philosophy, which emphasises influential shareholdings, the achievement of Board seats and internal agitation for change. GPG is rarely a passive owner of sub-influential stakes. We expect a good second-half result from AUW given its highly favourable operating environment and the strength of the interim result, and we doubt GPG’s real reason for selling was inside knowledge of something seriously wrong with the business. We think GPG told the truth when it implied it could not add any further value by being on the Board.

Investors should focus on the superannuation industry’s strong fundamentals:

** The need for all generations but particularly the one closest to retirement, the baby boomers, to save for their retirement

** Government support for superannuation as its preferred retirement funding vehicle, which it increased with better tax incentives in recent Budgets

** Compulsory superannuation contributions

** The surging sharemarket. Unlike the three fundamentals above this one will be cyclical

** The surge of inflows ahead of June 30, when the opportunity to contribute up to $1m with no tax consequences expired. While this event will not recur it did cause a step increase in industry funds under advice and management.

** Feedback from the companies we cover is that the surge came late in the month but was very impressive. We’ll hear how impressive when the companies report their profit results in coming weeks.

AUW is leveraged to these fundamentals because it owns operations across the superannuation value chain: from owning super funds to advice to managing money to platforms to trusteeship to estate planning. Ahead of the FY07 result on August 28 we upgrade our forecast by 3% and FY08 by 4%. The stock deserves a multiple above its peers’ because AUW is also integrating Select Managed Funds, a major merger which should bring further revenue synergies from cross-selling. Some revenue gains and most cost savings have already been captured. Examples of cross-selling opportunities are introducing estate planning services to Bridges clients, putting fund manager United on Bridges’ approved product list and offering advice to the clients of the corporate super funds AUW owns and advises. If all goes well AUW should be able to grow more quickly than the sector, justifying a premium multiple.

Previously we would have said AUW had no competitive moat but we are considering upgrading the rating to Narrow. It will depend on the scale and resilience of net fund inflows from the alliance between Bridges, AUW’s financial planning group, and the credit unions. 100 credit unions refer members to Bridges when they seek financial advice. We’ll decide on the moat rating after the full-year result.

During the June quarter AUW acquired the i.super and Finium corporate superannuation businesses from Zurich Australia and Genesys Wealth Advisers for an undisclosed sum. The acquisitions add upwards of $1.25bn in funds under administration and 65,000 members to AUW’s flagship Spectrum super platform. We expect more acquisitions as corporates find it too onerous to comply with APRA’s new licensing requirements for superannuation fund providers. The main downside risk in acquiring super funds is the discovery of unit pricing errors which require restitution.

Other downside risks include loss of financial planners from Bridges, and delays to the delivery of IT cost savings if the integration of platforms is postponed.