The share prices of our listed wealth management companies are helping to keep our market from sliding into the red today but it's IOOF Holdings Limited (ASX: IFL) that is getting the most attention in the sector.
Shares like AMP Limited (ASX: AMP) and Perpetual Limited (ASX: PPT) are trading under 1% higher when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is flat in late afternoon trade on Tuesday.
In contrast, IOOF has surged 2.6% to $11.20 and that may have something to do with Morgan Stanley upgrading the stock to "overweight".
This puts IOOF in a good position to challenge its record high of $11.52 that it hit in February 2007, just prior to the GFC. The broker has put a price target of $13 on the stock, which is a big revision from its previous target of $9.90.
The bullish reassessment of IOOF comes in the wake of its acquisition of Australia and New Zealand Banking Group's (ASX: ANZ) wealth division with the broker noting that the deal has now removed a major competitor for IOOF.
What this means is that IOOF has expanded scale and offers the best exposure to Australia's growing superannuation and pension industry.
IOOF is on an upgrade cycle. Funds under advice is up 34%, the number of advisors in its network jumps 71% and funds under management surges 115%.
"The $65m targeted synergies seem conservative, but deliver [more than] 20% EPS upside by FY21. Our analysis shows opportunity for ~$130m," said the broker.
Given these tailwinds from the acquisition and the potential for further earnings upgrades, the stock looks inexpensive as it is trading on a price-earnings multiple of 15 times.
The broker believes under a bull case scenario, synergies from the merger could deliver circa $1.4 billion of value, and that would imply an upside to earning per share growth that is in excess of 40%.
What the market is also not pricing in is the growth potential from IOOF offering advice to customers under new regulatory changes. IOOF has been building a business model with a more modular and open architecture.
This could give it an edge in winning over bank and independent advisors to its platform and the upside from this is not captured in Morgan Stanley's forecasts.
IOOF's forecast yield isn't too shabby either. It stands at around 4.5%, or ~6.4% once franking credits are included. There's plenty of scope for IOOF to lift its dividends too if Morgan Stanley's growth assumptions for the stock are to be believed.
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