Shares in IOOF Holdings Limited (ASX: IFL) may have stormed into a bull market over the past year, but there is more upside for the stock if Morgan Stanley's prediction that the wealth manager is on the cusp of an upgrade cycle comes to pass.
The stock has jumped around 20% to last trade at $10.91 over the past 12 months, when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up around 7%.
The upbeat outlook for equity markets is just one supporting driver for wealth managers, but IOOF will get another boost from its acquisition of Australia and New Zealand Banking Group's (ASX: ANZ) wealth business.
"Meaningful synergy upside for IOOF supports an upgrade cycle," notes Morgan Stanley. "While the ANZ deal is potentially transformational, successful execution of the modular business model provides a 'free option' on growth."
This is why it is important that IOOF provides reassurances to investors that the acquisition is on track to be completed by September 30 this year and the broker highlighted six areas that investors will need to pay close attention to.
The first is the retention of ANZ's wealth advisors and the stability of Funds under Advice (FuA). The second is the growth of this advisor network while investors should also look at how well IOOF executes its modular business model.
The remaining three things to look for include IOOF's ability to control its 2H17 expense base, its platform operating margin and its fourth quarter flows and margins for its advice business.
Morgan Stanley has an "outperform" recommendation on the stock with a price target of $13 a share.
However, this is the only wealth manager under its coverage that the broker is bullish on. While Challenger Ltd (ASX: CGF) has been a stronger performer with a gain of nearly 28% over the past year, the broker thinks it's fully priced and has an "underperform" rating on the stock.
Meanwhile, it has a "neutral" rating on AMP Limited (ASX: AMP) even though the stock seems to have lots of room to play catch up as it has only managed to deliver a 2.4% increase over the past 12 months.
"Low expectations combined with a likely clean in-line result and reinstatement of the buyback present upside," noted the broker. "But unlocking long-term value is likely to demand patience and strong execution."
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