Market Overreacts to IOOF's Fiscal 2016 Guidance

The market reacted negatively to IOOF’s fiscal 2016 update, with the share price down over 7%. IOOF expects underlying NPAT of AUD 173 million-AUD 176 million, broadly in line with AUD 173.8 million last year. While only 2%-3.7% below our AUD 179.6 million forecast, guidance is 4.4%-6% below consensus. Revenue is being affected by weaker equity markets; this hurts the value of funds under management, advice and administration, or FUMA. We estimate that so far during second-half fiscal 2016, the ASX All Ordinaries Index has on average been 10% lower than the average for second-half fiscal 2015. While Australian equities represented only 39% of FUMA as at Dec. 31, operating leverage within the business accentuates the impact of lower revenue on the bottom line. Gross margins and operating costs are reportedly unchanged in second-half fiscal 2016 from first-half fiscal 2016. Our narrow moat rating, underpinned by brand and switching costs, is unchanged.