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Market underestimates Insignia’s recovery potential, says analyst

By Maja Garaca Djurdjevic
5 minute read

A strategist believes the market is downplaying Insignia’s ability to stabilise its earnings.

Throughout 2023, Insignia experienced a notable decline in its share price as the company continued to execute its strategic agenda with the aim to lay the foundations of a business with a competitive advantage.

Insignia’s share price hit a year high of $3.74 on 18 January 2023, but steadily decreased to $2.07 on 23 November. On 22 February this year, it rose to $2.57 before zigzagging to reach $2.24 at close on 28 May.

Back in November, chairman Allan Griffiths acknowledged disappointment over the company’s share price performance despite efforts to execute its strategic agenda. The acquisition of MLC may have dampened confidence, he said.

In financial year 2023, while the three-year MLC integration program continued, Insignia also finalised the separation of its pensions and investments business, concluded all transitional services from ANZ in October 2022, and then took deliberate and decisive steps to “refine and realign” its advisory services.

The firm witnessed a significant decrease in its advice business from a quantitative perspective, a trend the company has attributed to a strategic shift in its operational approach, which included a new partnership model for its self-employed licensees comprising RI Advice Group, Consultum Financial Advisers, and TenFifty.

Approaching the end of its current three-year plan, Insignia said it has refreshed its forthcoming three-year strategy, scheduled to launch in 2025, which is anticipated to yield financial growth, aiming for a cost-to-income ratio in the mid-60 per cent range within the span of three years.

Despite shareholders’ lack of conviction in the firm’s recovery and concerns about its brand integrity, Morningstar’s equity analyst Shaun Ler has offered a contrasting view to prevailing market sentiment.

In an analysis published on Wednesday, he said that despite investor wariness of issues like margin compression and sluggish flows, he believes that the market is downplaying Insignia’s ability to stabilise its earnings.

“Investors appear to be deterred by margin compression, sluggish flows, restructuring challenges and deteriorating debt coverage,” Ler said.

“We think these concerns are overblown, and the market underappreciates Insignia’s ability to stabilise earnings. We see cost-cuts counterbalancing tepid revenue declines.”

According to Ler, Insignia can continue reducing costs over the next five years, leveraging synergy programs such as headcount reductions, property and system consolidation, and renegotiation of fees charged by external fund managers.

“There is ample room for removing duplicate or non-essential costs to extract scale efficiencies,” he said.

“Prior cost-out programs were implemented on schedule despite inflation and ongoing outlays for business development, regulatory compliance, and technology investments.”

Turning to Insignia’s platforms business, Ler said he disagrees with the market’s pessimistic assumptions regarding this division of the firm, where the stock price implies ongoing losses in client funds and market share.

Comparing Insignia’s platforms business to peers like HUB24 and Netwealth, the strategist noted the “worst is over” with Insignia’s product improvements and competitive fees expected to help it compete more effectively with its industry peers.

“We expect funds in the platforms business to keep increasing in the next five years,” Ler said.

“Client redemptions should be more than offset by the compounding of market returns – given large administered volumes, as well as increased appeal of its platforms – which are catching up to fast-growing competitors in terms of features and fees.

“Redemptions will likely give way to net inflows by fiscal 2027 as Insignia keeps improving its products, legacy product closures cease, and rates fall, which makes risk assets more attractive to investors.”

Regarding Insignia’s asset management business, Ler predicted that redemptions from asset management products will moderate, driven by competitive fees and strong returns compared to active peers.

“Notably, advisers often favour Insignia’s multi-asset funds for client recommendations, as they are usually cheaper than boutique funds and offer immediate exposure to different asset classes,” he said.

Moreover, Ler opined that this part of the business is undervalued relative to its performance and offerings.

“Fee compression for Insignia’s asset management products should slow, as they are already priced below many active peers. Products of other active peers like Magellan and Platinum have much higher fees,” he elaborated.

“Given the potential profit decline from aggressive price cuts and fundamentally different offerings, these peers are unlikely to materially narrow their fee gap with Insignia. Insignia’s core products are multi-asset funds that are priced cheaper than boutique funds”.

On the advice front, Ler tipped advice revenue to improve as the firm properly integrates its acquisitions and simplifies.

“We believe Insignia’s advisor network restructure is likely to solidify the firm’s reputation, reduce organic advisor attrition, minimise adviser workflow disruptions, and restore morale.

“Efforts to streamline working processes and new technology upgrades should improve adviser productivity.”

Ultimately, Ler believes a company-wide “turnaround is underway”.

“Group cost/income ratio fell in first half fiscal 2024 despite successive increases from first half fiscal 2020. The proportion of funds in newer platforms with better features and lower fees is growing. Its platform market share looks to be steadying from consecutive declines. The advice business achieved EBITDA profitability in first half fiscal 2024 after five halves of losses," the strategist said.