More Restructuring

4Q TRADING UPDATE

Need To Know

• New cost-out program of ~$100m focused on Advice simplification.
• Advice business will move to a separate standalone entity, with staff ownership and IFL selling down over time.
• Extraction costs total $340-$375m or ~$180m per year over FY24-25E of additional one-off costs.
• Capital releases and asset sales can fund ~$105m of the program. We continue to see elevated balance sheet risk, which drives our Sell rating.

Business updates: 30 June FUMA $295bn, +1.3% in the June Quarter. Net inflows continue to be soft, with just $670m achieved in FY23 (in line with IFL guidance). Higher markets accounted for the majority of FUMA increase. IFL lost 70 advisers in the quarter, leaving adviser numbers at 1,413.  

Further restructuring: A simpler business is a better business in financial services. So, on one hand, today’s new restructuring initiatives are welcome and point to a simpler future with greater staff (financial adviser participation) in the new advice entity.

The process is long-dated and expensive – which is likely to result in further elevated one-off charges over FY24/25E for IFL. IFL talk to $175-$195m pa ongoing cost benefit when all is said and done. Very little of this looks to be in consensus estimates.

Historically it has been difficult to measure how successful IFL has been at taking costs out of the business given >$300m off cumulative one-off costs which have impaired results since 2018. We continue to highlight that there remains a risk that many of those ‘one-off costs’ are normal costs of business, and not strictly one-off. The market is likely to be skeptical about baking in the full amount of cost savings.

It’s unclear whether remediation costs, which stood at $290m in 1H23 Result are included in today’s advice extraction costs of $340m-$375m. This will likely add to balance sheet pressure, which is already elevated in the 1.1-1.3x range for ND/EBITDA.

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. 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, its high balance sheet leverage coupled with ongoing further restructuring ahead, we continue to highlight earnings risks which remain to the downside, with operational risks increasing.