FY23 results overview (vs consensus):
Revenue $1,380m vs $1,423m
EBITDA $344m vs $356m
NPAT $191m vs $197m
EPS 29.6cps vs 29.2cps
DPS 19.8cps 20.6cps (64% payout of 2H23 UNPAT, 60-90% payout range)
Guidance: FY24 net-revenue margin to fall by 1.5-2.5 basis points (bps), on 47.8bps which amounts to around $60m at mid-point.
EBITDA margins 0.0-0.5 bps decline on 12.5 bps in FY23.
IFL guides to net positive inflows in FY24.
Investment Implications
In our view, IFL has three core issues for investors (these are not new issues)
Revenue outlook – repricing the platform business, by dropping prices by 1.5-2.5bps is likely to create >$50m revenue headwind for IFL in FY24E. The fee taken in FY24 is likely to be 44-45bps in platform assets, relative to 47bps in FY23.
Costs- Despite announcing a cost-cutting program in July, IFL has flagged a surprise $20m jump in compliance costs. IFL cost to income remains uncomfortably high at 75%. IFL has a track record of material one-off costs impacting the results. In 2H23 there was $92m of one-costs, excluded from the results. Looking ahead, IFL has flagged $350m of one-off costs.
Balance sheet – already contains leverage which is too high in our view. The risk is that poor cash generation in FY24/25 exacerbates the financial leverage. The dividend has been cut, with the dividend reinvestment program (DRP) remaining in full swing to help lower leverage (whilst diluting shareholders). Looking further ahead, IFL’s ~$200m in subordinated notes mature in FY26, with no clear plan for maturity.
Investment View
Our Sell call on IFL is premised on IFL having past peak earnings, coupled with an over-leveraged balance sheet.
Further cost savings are long-dated and come with restructuring costs which will partially need to be funded on the balance sheet in our view. This is likely to increase balance sheet leverage, something we already see as being uncomfortably too high.
Earnings quality, never an IFL strong point (>$300m of one-off costs since 2018), is likely to remain poor over 2024-25E as a consequence, one-off charges of >$100m per half are likely through FY24-25E.
With IFL having passed peak earnings for the foreseeable future, high balance sheet leverage coupled with ongoing further restructuring ahead, we continue to highlight downside earnings risks (and not factored into the share price).
Figure 1: We see downside risk to IFL's dividends and payout ratio
Figure 2: IFL platform margin is expected to fall into FY24E-25E
Risks to Investment View
Risks to our investment thesis on IFL include margin trends normalising, unexpected winning of market share, greater-than-expected cost synergies associated with the ANZ P&I and MLC acquisitions, and higher-than-expected appreciation of asset values in markets where Insignia provides services.
Asset sales or aggressive restructuring could challenge our Sell thesis on IFL.
