FY22 result: IFL’s underlying NPAT of A$224m was a 3% beat on consensus. There were two main areas that surprised market. Firstly, it was expected that the Gross Margin in the platform business would decline, yet it remained flat from 1H22 to 2H22 at 48bps.
Secondly, IFL was able to reduce its costs over FY22. $73m of cost synergies was achieved largely through the reductions in employee expenses. However, it must be noted that such reduction in costs may not be repeated in FY23, hence there is some earnings risk.
IFL has declared a final dividend of 11.8cps to be paid on 29 September 2022, bringing the full-year dividend to 23.6cps
The balance sheet remains a concern: IFL’s available cash balance has decreased, whereas its total debt has increased, leading to IFL adjusting its net debt figure to $391m. IFL also has a remaining one-off expense program of ~$511m. This one-off expense (post tax) plus the net debt figure equates to a $749m effective debt burden which is a >2.0x net debt to FY23e EBITDA. In our view, this level of adjusted net-debt / EBITDA is on the high side for financial services.
In an attempt to repair its balance sheet and reduce its significant debt, IFL has sold some of its assets. The recent sale of its Australian Executor Trustees (AET) unit for $135m will be utilised to paydown its debt and fund some one-off expenses. However, it is likely that the sale of AET alone will not be enough, thus IFL may look to sell more assets such as Antares to further repair its balance sheet.
FY23 guidance: In our view, IFL’s guidance for FY23 is bearish. It has implied a Group Gross Margin step down of 1.5bps-2.5bps, driven by platform re-pricing and product mix. Also, IFL has provided an outlook for its Group Net Operating (EBITDA) margin that is expected to be in-line with FY22. From this, lower earnings can be expected for FY23.
Investment view
Despite IFL reporting an above consensus FY22 result, its balance sheet remains a significant concern with >2.0x net debt to FY23e EBITDA. Additionally, it is also a concern how IFL is stripping out the platform investment as ‘one-off’ costs when the industry pairs do not. In our view, we think consensus estimates are too high and IFL has passed its peak earnings for the foreseeable future.
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, higher-than-expected appreciation of asset values in markets where Insignia provides services.
Recommendation
We have downgraded our recommendation to a Sell from Hold.
Figure 1: Market Earnings estimates– we see FY23 ebitda ~10% lower THAN market estimates
