The IOOF Holdings Limited (ASX: IFL) share price crashed today after a top broker warned that its platform earnings could fall by a quarter and downgraded the stock as a result.
The IOOF share price tumbled 6.3% to $5.42 in the last hour of trade – making it the second worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
The stock with the wooden spoon is the Fortescue Metals Group Limited (ASX: FMG) share price which fell 8.3% to $8.26 as the stock went ex-div while the ALS Ltd (ASX: ALQ) share price took a 4.3% hit to $7.22 to become the third worst performer on the ASX 200 no thanks to its poor outlook released yesterday with its full year result.
Unstable platform
The situation with IOOF looks grim and UBS has cut its recommendation on the stock to "sell" from "neutral" and lowered its price target by 13% to $5.05 a share.
The broker noted that while IOOF has greater funds under administration (FUA) and enjoys a more stable advisory business compared to AMP Limited (ASX: AMP) and the big banks, it has doubts about IOOF's ability to sustain this momentum, particularly given the higher pricing for its Contemporary platform.
"With already superior cost efficiency reducing the scope for offsets to revenue pressure, we believe IFL's platform earnings could compress 25% over five years," said UBS.
"It appears unavoidable that IFL will play catch-up and this could see Platform gross margins drop one-third or 8% CAGR over 5 years."
Risk of acquisition falling over
Further, there are growing concerns that IOOF may not be able to complete its acquisition of Australian and New Zealand Banking Group's (ASX: ANZ) Pension & Investment business (P&I) as it now seems likely that approval will also need to be sort from APRA.
This could potentially delay the completion of the deal till the first half of FY20, and this increases the risk that the transaction will not be completed.
This could create downside pressure on the IOOF stock as the market had gotten excited about the acquisition back in 2017.
"Furthermore, weaker 1H19 P&I earning drivers and our revised platform sector outlook indicate reduced value upside should the deal proceed," added UBS.
"Our 'deal' scenario valuation drops to $6.10, implying only 5% upside vs 13% downside under our $5.05 no-deal base case. With IFL's shares at $5.80, this implies a ~75% probability of completion – too high in our view."
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