AUSTRALIA IFL AU Price (at 06:35, 26 Oct 2016 GMT) Outperform A$8.34 Valuation A$ - DCF (WACC 8.8%, beta 1.1, ERP 5.0%, RFR 3.3%) 8.74 12-month target A$ 9.00 12-month TSR % +14.3 Volatility Index Low/Medium GICS sector Diversified Financials Market cap A$m 2,503 30-day avg turnover A$m 5.5 Number shares on issue m 300.1 Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m 573.2 580.9 605.4 623.5 EBIT m 241.7 245.2 260.4 267.9 Reported profit m 196.7 133.4 144.2 149.4 Adjusted profit m 173.3 172.8 183.6 188.8 Gross cashflow m 185.5 185.6 197.0 203.0 CFPS 61.4 61.4 65.2 67.2 CFPS growth % -2.8 0.0 6.1 3.0 PGCFPS x 13.6 13.6 12.8 12.4 PGCFPS rel x 1.21 1.34 1.32 1.34 EPS adj 57.4 57.2 60.7 62.5 EPS adj growth % -4.0-0.4 6.2 2.9 PER adj x 14.5 14.6 13.7 13.3 PER rel x 0.79 0.89 0.89 0.90 Total DPS 54.5 51.6 54.8 56.4 Total div yield % 6.5 6.2 6.6 6.8 Franking % 100 100 100 100 ROA % 8.7 8.9 9.4 9.6 ROE % 12.6 12.3 12.9 13.1 EV/EBITDA x 10.1 9.9 9.3 9.0 Net debt/equity % 1.4 0.3-1.3-2.9 P/BV x 1.8 1.8 1.7 1.7 IFL AU vs ASX 100, & rec history Positive flows in 1Q17 Event FUM and Net Flows for September Qtr 2016. Impact Total Group: Positive net flows: +$833m in the Sept. qtr 2016, represents +3.2% (annualised) of the June 2016 FUM Opening Balance. Note that Net flows of +$833m excludes $179m Pension Payment outflows and $436m distributions classified as other. FUMAS: $138.1bn, +$7.0bn vs June 2016 due to market and other movements (+$2.4bn), an increase in Funds Under Supervision (+$4.0bn) and Net Flows adjusted for pension payments (+$0.65bn). Group Net Flows (pre Pension Payments and distributions) showing steady improvement since Dec 2015 Source: Company data, Macquarie Research, Oct 2016. Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, October 2016 (all figures in AUD unless noted) 26 October 2016 Macquarie Securities (Australia) Limited Short interest remains high: We also highlight the level of short interest in IFL (8.7% of free float). The short interest is materially higher than the other financial stocks under our coverage (average short interest 1.7%). Earnings and target price revision EPS changes: FY17e: -0.8%; FY18e: -1.9%; FY19e: -2.8%. Target price to $9.00 from $9.20. Price catalyst 12-month price target: A$9.00 based on a DCF methodology. Catalyst: Investor Day on 2 November 2016 Action and recommendation Outperform. Flows improvement needed to drive performance. Please refer to page 7 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Flows analysis Overall, IFL flows started the FY17 year strongly across all divisions with +$833m of net inflows, representing +3.2% of FUMA annualised in 1Q17. This compares to +$501m (+2.0% of FUMA) in 4Q16 and +$1,241m (+4.0% of FUMA) in 1Q16. Fig 1 Group Net Flows (pre Pension Payments and distributions) showing steady improvement since Dec 2015 Advice division: FUA $52.0bn, +$2.0bn vs June 2016. Positive net flows: +$327m in the September quarter, represents +2.6% (annualised) of the June 2016 Opening Balance with "strong inflows from the aligned adviser groups". Net inflows of $327m (+2.6% of FUA annualised) in 1Q17 compared to +$339m (+2.8% of FUMA) in 4Q16 and +$509m (+4.1% of FUMA) in 1Q16. Fig 2 IFL advice business performing well 26 October 2016 2
Platform division: FUA $35.3bn, +$0.7bn vs June 2016. Positive net flows: +$151m in the September quarter, represents +1.7% (annualised) of the June 2016 Opening Balance. Note that Net Flows (+$151m) exclude Pension Payments of $179m in the quarter. IFL s Platform Flagship quarterly net inflow was +$149m, with $142m in Pension Payments, in the Sept. 2016 qtr. Net inflows of $151m (+1.7% of FUA annualised) in 1Q17 compared to +$312m (+3.7% of FUMA) in 4Q16 and +$115m (+1.3% of FUMA) in 1Q16. Fig 3 Net inflows for Platforms remained strong in 1Q17 Investment Management division: FUM: $19.9bn, +$0.3bn vs June 2016. Positive net flows: +$355m in the September quarter, represents +7.2% (annualised) of the June 2016 Opening Balance, with flows from flagship platforms and Shadforth into IFL s investment business. Flows also benefited from re-allocation post platform rationalisation in June 2016. Net inflows of +$355m (+7.2% of FUA annualised) in 1Q17, compared to -$150m (-3.1% of FUMA) in 4Q16 and +$617m (+6.4% of FUMA) in 1Q16. Note that Investment management distributions for 1Q17 (~$436m) vs 1Q16 (~$213m) are excluded from the net flows disclosure and included in other. 26 October 2016 3
Fig 4 Investment management returned to inflows in 1Q17 Supervision division: FUS: $31.0bn vs $27.0bn at June 2016. Short interest remains high We also highlight the level of short interest in IFL. The short interest is materially higher than the other financial stocks under our coverage. Fig 5 Short interest financials Source: ASIC, Macquarie Research, Oct 16 Fig 6 IFL short interest at 7.5% (8.7% of free float) Source: ASIC, Macquarie Research, Oct 16 26 October 2016 4
Holdings Limited IFL AU Price: 8.34 Profit and Loss 1H16A 2H16A 1H17E 2H17E FY15A FY16A FY17E FY18E FY19E Revenue 456.8 429.0 443.6 457.1 926.9 885.9 900.7 944.8 984.0 Direct Costs (181.7) (170.2) (173.6) (177.5) (370.9) (352.0) (350.5) (369.8) (390.6) Gross Margin 275.1 258.8 270.0 279.7 556.0 533.9 550.3 574.9 593.4 Other Revenue 22.1 17.2 15.6 15.6 39.1 39.3 31.2 31.0 30.8 Associate Income 2.8 2.0 2.1 2.1 6.5 4.8 4.2 4.3 4.4 Total Revenue 300.0 278.0 287.7 297.4 601.6 578.1 585.7 610.2 628.5 Operational expenses (165.2) (161.7) (163.6) (165.0) (343.0) (327.1) (328.6) (337.4) (347.5) EBITDA 134.8 116.3 124.1 132.4 258.6 251.0 257.1 272.8 281.0 Share based payments (1.3) (0.6) (0.6) (0.7) (3.6) (2.0) (1.3) (1.4) (1.4) Depreciation (4.7) (4.8) (4.9) (5.1) (7.9) (9.6) (10.0) (10.5) (11.1) Net Interest expense (1.3) (1.3) (1.5) (1.5) (4.6) (2.4) (2.9) (2.9) (2.8) Profit before tax 127.4 109.6 117.1 125.2 242.5 237.1 242.9 258.1 265.6 Tax (30.7) (32.5) (32.2) (34.5) (66.5) (63.2) (66.7) (71.0) (73.1) Minority interests (1.3) (1.3) (1.4) (1.4) (2.2) (2.6) (2.8) (2.9) (3.1) Discontinued Operations - 2.1 - - - 2.1 - - - Underlying Profit 95.4 77.9 83.5 89.3 173.8 173.4 173.4 184.1 189.4 Amortisation (20.0) (19.7) (19.7) (19.7) (38.6) (39.7) (39.4) (39.4) (39.4) Significant items (after tax) 58.6 4.5 - - 3.2 63.1 - - - Reported Profit 134.0 62.6 63.8 69.6 138.5 196.8 134.0 144.7 150.0 Cash flow 1H16A 2H16A 1H17E 2H17E FY15A FY16A FY17E FY18E FY19E Receipts 500.4 504.5 461.3 474.8 1,037.7 1,004.8 936.2 980.1 1,019.2 Payments (381.6) (376.2) (337.2) (342.4) (791.2) (757.8) (679.6) (707.8) (738.8) Cash EBITDA 118.7 128.3 124.1 132.4 246.5 247.0 256.5 272.3 280.4 Tax paid (45.2) (24.3) (32.2) (34.5) (62.5) (69.5) (66.7) (71.0) (73.1) Other (5.3) (5.4) (7.1) (2.0) (2.1) (10.7) (9.1) (2.6) (3.8) Operating Cash flow 68.2 98.6 84.9 95.9 182.0 166.8 180.7 198.6 203.5 Acquisitions & Inv (7.8) 5.4 - - (47.1) (2.4) - - - Capex (1.0) (7.4) (5.4) (5.6) (6.9) (8.4) (11.0) (11.5) (12.1) Other 52.7 1.7 0.4 0.4 11.0 54.4 0.8 0.8 0.8 Investing Cash flow 43.9 (0.3) (5.0) (5.2) (43.0) 43.7 (10.2) (10.7) (11.2) Dividends Paid (87.0) (87.0) (74.7) (80.1) (155.4) (173.9) (154.9) (164.5) (169.3) Net change in borrowings (0.4) (0.6) - - 75.4 (1.1) - - - Net change in equity capital (5.0) (2.2) - - (11.4) (7.2) - - - Other - - - - (1.3) - - - - Financing Cash flow (92.4) (89.8) (74.7) (80.1) (92.6) (182.2) (154.9) (164.5) (169.3) Key Ratios 1H16A 2H16A 1H17E 2H17E FY15A FY16A FY17E FY18E FY19E Reported EPS (diluted, cps) 44.4 20.8 21.1 23.0 47.7 65.1 44.2 47.7 49.5 Underlying EPS (diluted, cps) 31.6 25.8 27.6 29.6 59.8 57.4 57.2 60.7 62.5 Underlying EPS growth (%) 9.6-16.6-12.5 14.5 14.6-4.0-0.4 6.2 2.9 DPS (cps) 28.5 26.0 24.9 26.7 53.0 54.5 51.6 54.8 56.4 Payout ratio (%) 90.2 100.7 90.2 90.2 88.7 94.9 90.2 90.2 90.2 Dividend yield (%) 6.8 6.2 6.0 6.4 6.4 6.5 6.2 6.6 6.8 PER (x) 13.2 16.2 15.1 14.1 14.0 14.5 14.6 13.7 13.3 P/B (x) 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.7 Return on Equity 13.7 11.0 11.9 12.6 15.9 12.5 12.3 12.9 13.0 Return on Assets 6.9 5.7 6.1 6.5 7.2 6.3 6.3 6.6 6.8 EBITDA margin 44.9 41.8 43.1 44.5 43.0 43.4 43.9 44.7 44.7 Gross Margin (bps) 41.0 39.7 39.6 39.5 37.7 40.4 39.6 38.9 38.1 Net Margin (bps) 20.1 17.9 18.2 18.7 17.5 19.0 18.5 18.5 18.0 Average FUMAS (A$bn) 134.2 130.3 136.4 141.7 147.6 132.1 139.0 147.7 155.9 Operating Cost to Income (%) 60.0 62.5 60.6 59.0 61.7 61.3 59.7 58.7 58.6 Balance Sheet 1H16A 2H16A 1H17E 2H17E Valuation Sum of the parts Cash 178.4 187.0 192.1 202.7 Platform 1,770 Receivables 106.5 102.4 98.7 102.1 Advisers 1,256 Intangibles 991.7 991.7 991.7 991.7 Funds Management 624 Other 1,492.2 1,461.7 1,466.2 1,469.4 Trust 140 Total Assets 2,768.8 2,742.8 2,748.8 2,765.8 Corporate -946 Debt -208 Payables 68.6 68.8 69.3 71.7 Valuation 2,637 Borrowings 207.4 207.0 207.0 207.0 Shares 302 Investment contract liabilities 893.2 879.3 879.3 879.3 Valuation per share 8.74 Other 177.8 188.0 188.0 188.0 Price Target 9.00 Total Liabilities 1,347.0 1,343.1 1,343.6 1,346.1 Capital Return 7.9% Dividend Yield 6.2% Net Assets 1,421.8 1,399.7 1,405.2 1,419.7 Total Shareholder Return (TSR) 14.1% 26 October 2016 5
Macquarie Quant View The quant model currently holds a neutral view on. The strongest style exposure is Valuations, indicating this stock is under-priced in the market relative to its peers. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 309/572 Global rank in Diversified Financials % of BUY recommendations 54% (7/13) Number of Price Target downgrades 0 Number of Price Target upgrades 0 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Diversified Financials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. Perpetual Magellan Financial Group 0.4 0.7 Perpetual Magellan Financial Group ASX 0.3 ASX AMP 0.3 AMP BT Investment Management 0.2 BT Investment Management 0.1 Platinum Asset Management -1.3 Platinum Asset Management -3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Perpetual Magellan Financial Group ASX AMP BT Investment Management Platinum Asset Management 0.1-0.1-0.2-0.4 0.0-0.1-1.0 Perpetual Magellan Financial Group ASX AMP BT Investment Management Platinum Asset Management -3.0-2.0-1.0 0.0 1.0 2.0 3.0-30% -20% -10% 0% 10% 20% 30% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Sales NTM Sales to EV NTM Price to Sales FY1 EV/EBITDA (NTM) ROIC FY0 Asset Turnover Operating Margin FY0 Earnings Stability -36% Negatives Positives -22% -17% -17% -40% -20% 0% 20% 40% 33% 32% 38% 37% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score 0.08 0.29-0.21-0.10-0.17-0.30-0.05 0.24-1.36 0.50 0.50 Percentile relative to sector(/572) Percentile relative to market(/423) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 26 October 2016 6
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 September 2016 AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients) Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients) Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients) IFL AU vs ASX 100, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, October 2016 12-month target price methodology IFL AU: A$9.00 based on a DCF methodology Company-specific disclosures: IFL AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Holdings Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 09-Aug-2016 IFL AU Outperform A$9.20 27-Jul-2016 IFL AU Outperform A$9.50 18-May-2016 IFL AU Outperform A$8.90 25-Feb-2016 IFL AU Outperform A$8.80 28-Aug-2015 IFL AU Outperform A$11.10 02-Jun-2015 IFL AU Outperform A$12.10 24-Apr-2015 IFL AU Outperform A$11.90 26-Feb-2015 IFL AU Outperform A$11.40 22-Aug-2014 IFL AU Outperform A$10.70 16-May-2014 IFL AU Outperform A$10.60 06-Feb-2014 IFL AU Outperform A$10.00 Target price risk disclosures: IFL AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. 26 October 2016 7
This publication was disseminated on 26 October 2016 at 08:30 UTC. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures Macquarie Group 26 October 2016 8