Sandstone Insights: Insignia Financial's high costs prompt sell rating

This article was written by Sandstone Insights on 3 May, 2024.

Suggestion: sell

Need to know

• Insignia Financial Ltd (IFL) remains in a position of historically high net outflows.
• We expect net outflows will accelerate into the June quarter.
• One-off costs continue to be an issue for the business and we expect it will be a key focus for the new CEO.
• Re-affirm Sell rating as net outflows and costs continue to drag group earnings.

Key highlights

• FUA of AU$223.4 billion vs $219 billion consensus
• FUM of AU$88.9 billion vs $87 billion consensus
• 1100 financial advisers in March 24, vs 1199 in December 23.

Balance sheet

• Net debt elevated to $517 million in the first half of FY24
• A high leverage ratio of 2.8x projected EBITDA in FY26 due to approximately AU$200 million in NAB notes at the end of FY25.

Platform margin decline

• We expect FY25 will see a significant margin step-down due to price cuts and the conclusion of the MLC wrap transition
• An ongoing mix-shift towards lower-margin products will contribute to additional annual margin declines.

Ongoing one-off costs

• Persistent one-off expenses are a major concern, having accelerated over the last seven years
• Some moderation is expected in FY25, but ongoing one-off costs remain a headwind
• Reducing these costs should be a priority for the incoming CEO.

Investment implications

We remain unconvinced in the investment case, with the heightened risk of a further earnings reset under the new CEO. As the business continues to navigate through a period of net outflows, higher costs, and a weaker balance sheet, we continue to see downside risk in the share price.

_{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}