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Why IOOF Holdings Limited (ASX:IFL) profits are down despite organic growth

IOOF Holdings Limited (ASX: IFL) released its FY 2018 results today with statutory profit down 24% despite strong organic growth in the business.

Here are the highlights:

  • Statutory net profit after tax was down 24% to $88 million
  • A growing number of advisers led to a 28% increase in net inflows to $5.8 billion
  • An increased focus on cost management led to lower operating expenditures and a lower cost to income ratio (5% improvement to 53.1%)
  • The NATL acquisition was completed ahead of schedule and is starting to deliver synergies
  • A final fully franked dividend of 27 cents per share was declared (representing a 98% payout ratio)

IOOF’s underlying net profit after tax, i.e. profit after accounting for one-off items such as the acquisitions costs incurred in acquiring the wealth management division of Australia and New Zealand Banking Group (ASX: ANZ) was up 13% to $191 million.

What did management have to say?

IOOF’s Managing Director said, “This has been a good year of organic growth. IOOF continues to be an attractive alternative for independent and aligned advisers looking to partner with a specialist advice-led group.”

He also touched on IOOF’s competitive advantage in the marketplace saying, “Open architecture differentiates us from our peers, gives advisers and clients genuine choice and represents the strongest possible strategic positioning in the face of constant change”

Outlook

Looking ahead, I think IOOF will benefit from industry tailwinds such as increases in population and superannuation guarantee rates.

However, an area to keep an eye out on will be the cost of acquisitions and the synergies that can be obtained from them. Whilst the acquisitions will drive adviser numbers up, the full benefit from potential synergies might not be easy to obtain.

Changes in regulation is also a key risk for IOOF with the vertically integrated financial services business model currently under much scrutiny.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can find Kevin on Twitter @KevinGandiya.

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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