The IOOF Holdings Limited (ASX: IFL) share price is among the best performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index today after at least two brokers upgraded the stock.
The IOOF share price rallied 3.5% to a near one-year high of $7.30 ahead of the market close – making it the third best performer on the ASX 200.
In case you are wondering, the Bravura Solutions Ltd (ASX: BVS) share price is in the top spot with a 6.8% surge to $4.02 and Southern Cross Media Group Ltd (ASX: SXL) share price is in second place with a 3.7% run to $0.90.
Is IOOF finally in the "buy" zone?
Sentiment towards IOOF is turning after a torrid year with the Hayne Royal Commission and a court case by APRA sapping confidence towards the stock. Credit Suisse upgraded the stock to "outperform" from "neutral" following Australia and New Zealand Banking Group's (ASX: ANZ) decision to sell its wealth (P&I) business to IOOF at a $125 million discount to the original price.
Further, APRA decision not to appeal the Federal Court of Australia's ruling in relation to two of IOOF's businesses and certain directors and executives is another win for the wealth manager.
"We increase our target price to A$8.45 (from A$5.05), moving to our 'ANZ deal goes ahead' valuation," said the broker.
"While the acquisition still requires APRA approval, we consider the two announcements today as significant progress from the position a day prior."
Second upgrade
Citigroup also lifted its valuation on IOOF significantly and upgraded its recommendation on the stock to "Hold/High Risk" from "Sell/High Risk".
"With the ANZ P&I deal seemingly now having a strong likelihood of proceeding, we materially lift EPS [earnings per share] FY20E: +29%; FY21E: +46%; FY22E: +41%," said Citi.
"While IOOF still faces major hurdles such as the need to restructure its advice business economics and a doubling up of the business skew to platforms competition, we believe the added scale and associated cost synergies from the ANZ P&I deal should provide some earnings flexibility over the next three years."
The broker doesn't think APRA will stand in the way of the deal and had upped its price target on IOOF to $7.30 from $4.40 per share.
While the valuation on the stock got a big boost, Citi is forecasting a big cut to IOOF's dividend for this financial year as management will require more capital for its new advice business model. IOOF can't quantify the amount and investors will likely have to wait till early December for an update.
Citi is forecasting a dividend of 30 cents a share for FY20 compared to the 44.5 cents a share that IOOF paid in FY19.
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