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Why UBS thinks this is the time to buy IOOF Holdings Limited

Looking for a buying opportunity during this market carnage? Wealth manager IOOF Holdings Limited (ASX: IFL) may just hit the spot with its attractive share price valuation and above market yield.

What’s more, UBS has upgraded the stock to “buy” from “neutral” with a price target of $11.50 a share after noting that IOOF had tumbled by around 11% since announcing its intention to acquire Australia and New Zealand Banking Group’s (ASX: ANZ) wealth business in October last year.

The acquisition is expected to add more than 20% to IOOF’s earnings per share (EPS) but the market is taking a glass half empty view of the transaction and have de-rated the stock by over 30% on a price-earnings basis.

Investors are concerned about IOOF’s ability to bed down the acquisition and potential earnings attrition from ANZ’s business due to pressure on fees.

Investors can’t get over the fact that ANZ Wealth revenues have fallen by a 10% compound annual growth rate (CAGR) from FY15 to FY17 despite the buoyant market.

This has forced ANZ wealth to defend market share by cutting its platform fees by a 12.1% CAGR compared to reductions of 5.2% by IOOF and 6.4% by AMP Limited (ASX: AMP).

“However, our deep dive into ANZ Wealth suggests better earnings prospects ahead, supported by repricing opportunities which could lift group UNPAT [underlying net profit after tax] 7% and reduce product mix shift fee pressure by 50bps pa [basis points per annum] into outer years,” said UBS.

“With our 13% 3yr EPS CAGR outlook leaving IFL trading at an unwarranted 12% discount to the market by FY21E and a 6.4% average dividend yield over the interim, we upgrade to Buy.”

Margin pressure on ANZ Wealth’s operations should ease from here given that most of the pressure has come from superannuants moving to the lower-priced MySuper option. This is a non-recurring one-off move.

IOOF also points out that some of ANZ Wealth’s products are priced well below the market and there was an opportunity to lift fees for part of the portfolio.

It seems to me that the risks are more than baked in to the current share price and stock is one of the most attractive opportunities in the wealth sector, especially considering its relatively generous fully-franked dividend yield.

But IOOF isn’t the only stock worth keeping an eye on during the market turmoil. The experts at the Motley Fool have identified three other blue-chip stocks that are well placed to outperform this year.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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