The share price of IOOF Holdings Limited (ASX: IFL) crashed this morning to a six-month low after posting a 39% drop in profit to $45.2 million for the six months ended December 2017.
Investors have taken a glass half empty view of the results even though this year's profit isn't the main game for the wealth manager, which is acquiring Australia and New Zealand Banking Group's (ASX: ANZ) OnePath business in a deal worth nearly $1 billion.
But that has not stopped the stock from tumbling 3.3% to $10.15 as management also revealed a $28.3 million writedown of goodwill associated with its Perennial Investment Partners business.
Excluding the acquisition costs associated with OnePath, the writedown and other one-off expenses, underlying interim net profit would actually be up 19% to $94.8 million.
Investors aren't an easy bunch to please in this climate. We've seen some companies suffer big share price falls despite posting a decent result. This includes electronics retailer JB Hi-Fi Limited (ASX: JBH) and AGL Energy Ltd (ASX: AGL). I think IOOF fits into this category.
Perhaps its share price fall reflects some disappointment over its margins. While net operating margin increased 2 basis points to 0.23% in 1HFY18 compared to 1HFY17, it fell from 0.24% in the previous half.
Gross margin has also been under some pressure as this slipped to 0.45% from 0.48% in both the first and second halves of FY17.
Those hoping that the OnePath transaction would be bedded down sooner rather than later will also be disappointed. Management said the transaction will be completed in around October this year when some had been expecting September.
Its cashflow position isn't looking too hot either as its operating cashflow is not enough to cover dividends and its investing and financing activities.
It is interesting that management decided to lift its interim dividend by 1 cent to 27 cents a share, although it still has $157.6 million in cash on its balance sheet.
Given how strongly IOOF shares have outperformed, a "steady-as-she-goes" outlook is probably not enough to keep the stock powering ahead.
IOOF has jumped over 21% in value over the past 12 months, while its peer AMP Limited (ASX: AMP) and the broader S&P/ASX 200 (Index:^AXJO) (ASX:XJO) have only managed around a 2% gain.
However, I don't anticipate the weakness to persist. Assuming the integration of OnePath goes according to plan, it will be a game changer for IOOF as it will give the company significantly greater scale and synergies.
Management is anticipating mid-single digit earnings per share (EPS) accretion from the acquisition in FY19 and a circa 15% uplift in EPS in the first full year of integration. EPS accretion will accelerate from there with IOOF tipping over 20% plus thereafter.
Investors will just need to be a little patient.
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