Within the last 48-hours we’ve seen IFL look to raise ~$1bn to buy NAB’s wealth business MLC, this is a major deal especially for IFL who arguably will sink or swim depending on the implementation / integration of the acquisition. The total purchase price is $1.44bn which the board of IFL believes will give the business a sound footing to compete on scale in the Australian Super industry where big is beautiful has been the mantra. The deal will give IFL over $500bn in funds under management (FUM) as the business expands from its unpopular financial advice model with only AMP left in the space where regulations have made the cost of doing business both prohibitive and downright scary to many.
With potential big returns by definition comes big risk, the deal is flagged to be a huge 20% earnings accretive to IFL and the synergies flagged at $150m just a few years in but history tells us this will take some skilful integration to be successful. The $1.04bn raise at $3.50 is a huge 24.4% discount to the stocks close last week, dilution is significant with the new stock making up a phenomenal 85% of the current business. I’m glad we're looking at the deal now as opposed to being an existing shareholder.
We like the deal but the risks are very real hence the price MM will consider paying needs to be discounted accordingly. The stock movement is likely to happen in 2 phases, initially we will see the market decide upon a new fair value after the dust settles and then it will be a wait and see game as integration runs its course, we like the stock around $3.80, a 10% premium to the placement.
MM is very interested in IFL around $3.80.
IOOF Holdings (IFL) Chart
Today I have also had a quick look at 3 other contenders for our hard earnings in the fund manager sector i.e. the IFL placement is likely to cause some further kneejerk selling in the sector which could be more appealing than IFL where the future is certainly full of risk. We might look at a few others later in the week.
1. Janus Henderson (JHG) $28.63
The most recent 2nd quarter update by JHG showed assets under management of $US336.7bn up 14% on the quarter helped by market moves. However net outflows persisted hitting $US8.2bn for the quarter causing the stock to remain cheap compared to its peers. Through 2020 the share price has reflected bond yields almost as closely as the local banking sector hence at this stage the logic which MM is applying to the sector is flimsy at best with JHG, we’re neutral the stock around the $30 area.
MM is now neutral JHG.
Janus Henderson (JHG) Chart
2. Magellan Financial Group (MFG) $59.25
Hamish Douglass has stirred the Magellan ship admirably over the years and this was reflected by inflows in July - the company’s overall funds under management (FUM) sat at $98.5bn on July 31st. Overall this is a quality manager who has called the transition to the US / Global tech stocks extremely well but its weakness is its run hard and some profit taking would not surprise, we will be on alert ~6-8% lower – the stocks valued at a premium to most of the sector but we believe it deserves this status.
MM likes MFG in the mid $50 region.
Magellan Financial Group (MFG) Chart
3. Platinum Asset Mgt (PTM) $3.71
PTM endured a tough 2020 with FUM, revenue and profit all falling. At the end of the last financial year the company had FUM of $21.4bn, down 13.7%. Across the companies financials its been tough but this is reflected in the stocks valuation with an Est P/E for 2021 of 17.3x, basically the middle ground of todays 2 stocks.
MM is neutral PTM.
Platinum Asset Mgt (PTM) Chart
Conclusion
MM likes MFG out of the 3-stock considered today believing it’s not time to fight the trend of paying up for quality. Also, IFL will be interesting if it recommences trading around $3.80.
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Paul Bourke
At current prices IOOF is the buy of the next decade IMO