Insignia Financial (formerly IOOF) (ASX: IFL) provides wealth-management advice and products via a multibranded strategy.

Shares in no-moat Insignia remain materially undervalued relative to our $3.60 per share fair value estimate. Investors appear deterred by margin compression, sluggish flows, restructuring challenges, and deteriorating debt coverage.

We think these concerns are overblown, and the market underappreciates Insignia’s ability to stabilize earnings. We see cost-cuts counterbalancing tepid revenue declines, helping to underpin steady earnings before interest, taxes, depreciation and amortisation (“EBITDA”) and cost/income ratios of around $372 million and 73% per year over the four years to fiscal 2028. This compares with an average of $366 million and 74% per year in fiscal 2022-23.

In our view, there is ample room for Insignia to remove duplicate or nonessential costs to extract scale efficiencies. Comparable peers like Hub24 and Netwealth have achieved higher profitability despite having less funds under administration than Insignia. Recent cost-out programs were implemented on schedule despite inflation and ongoing outlays for business development, regulatory compliance, and technology investments.

We think revenue will decline over the long term but at a manageable rate. First, we expect fees, both in the platforms and asset management business, to compress slower in the future—lessening downside pressure on revenue. In platforms—where we expect EBITDA to account for 74% of our forecast midcycle EBITDA, future fee compression will largely reflect the natural state of competition and less from deliberate product closures or repricing. This is because product closures of expensive legacy products will gradually cease. In asset management—where EBITDA is forecast to make up 17% of midcycle EBITDA, already lower product fees relative to most active peers should prevent excessive fee compression.

Second, a potential decline in interest rates bodes well for improved flows, reflecting increased investor appetite for risk assets.

Business strategy and outlook

Insignia Financial (formerly IOOF) adopts a multibrand business model. This helps it appeal to a broader set of clients and was effective in alleviating reputational damages stemming from the 2018 Royal Commission. Since then, tighter compliance and operating standards have been enforced. Insignia is also restructuring its advisor network, intending to increase the proportion of salaried advisors within its network, as this helps the firm extract higher gross margins.

Product rationalizations and fee reductions are ongoing agendas for Insignia's platform business. Insignia advisors can also recommend investments on third-party platforms due to the firm’s open architecture model. Notably, it has arrangements with third-party providers where it earns part of their administration fee for funds originated by its advisors. As competition intensifies, Insignia has responded by rationalizing its platforms and improving their functionality, helping the firm build scale to further lower the cost to customers.

Insignia's investment business manages both multimanager and direct investment funds.
Mergers and acquisitions have been Insignia's major focus, driving efficiencies through economies of scale and removal of duplicated back-office functions, while also allowing the firm to sell its own products to new clients.

We think Insignia can stabilize its earnings base. Profitability improvements are underway. Cost-outs are a primary driver, and we think there is ample room for the firm to remove duplicate or nonessential costs to extract scale efficiencies, noting that comparable peers like Hub24 and Netwealth have achieved higher profitability despite having less funds under administration than itself. Revenue is likely to decline over the long term, but at a manageable rate. We expect fee margins to compress slower, and for client redemptions to moderate over time as Insignia keeps improving its products, legacy product closures cease, and as interest rates fall globally.