Is Acquisitive Growth The Right Strategy For Bank of Queensland?

This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ

-Principals risk in deal
-Furthers growth options
-Share upside limited
 

By Eva Brocklehurst

Brokers have welcomed the turnaround in Bank of Queensland ((BOQ)) over the past year and now the bank will add the Investec Australia professional finance and asset finance & leasing businesses to its stable. The acquisition price is $440m, to be funded largely via a $400m entitlement offer. The transaction is expected to be around 2% accretive to FY15 earnings and 4% accretive to FY16.

This particular business finances the practice of doctors, dentists, vets and accountants and is also a mortgage broker to these customers with a mortgage book totalling $2.2 billion.The asset finance and leasing has a book in imaging technology, plant & equipment and vehicles. UBS thinks the operation will accelerate the bank's growth and diversification of the commercial book. Nevertheless, the broker notes these businesses centre on a client relationship and "key man risk" is material in this case. Citi goes further on this subject.

The acquisition looks a good fit, in Citi's view. The broker thinks the bank has a need to build out the quality specialist, Australia-wide business lending, given that pursuing growth in Queensland business lending exacerbates regional risk. However, Citi notes this is the third time the founders have sold a professional finance business while retaining key roles and their possible departure is the risk in the transaction. This management team founded MedFin and sold a majority stake to MLC before National Australia Bank bought MLC. The principals departed and founded Experien Finance which was ultimately purchased by Investec. Citi understands there are no special earn-out contracts or locks on the founders to incentivise them to stay with Bank of Queensland. They could leave and start a rival operation.

Bank of Queensland continued to de-risk its balance sheet and control expenses in the first half, with brokers giving the thumbs up to a "clean" result. To UBS it was the most straightforward result in over a decade. Citi notes, while some may question the bank's ability to integrate the Investec business, it has managed to absorb St Andrews and Virgin Money without incident. Citi is of the view that, as loan growth is weak, this was the best course for the bank to pursue.

Acquiring Investec's businesses is a positive move, given the strong position in a fast-growing niche market, but is not without integration risk, in Deutsche Bank's opinion. The broker thinks it may also dilute potential upside, should the bank achieve advanced accreditation on its mortgage book. Deutsche Bank believes the bank, despite struggling to grow the loan book because of the ru- off in its line of credit and impaired commercial banking portfolios, is well placed for strong growth in the medium term, particularly if Queensland recovers to national averages. Despite this prognosis, the broker contends the stock is trading broadly in line with the majors on an FY15 price/earnings basis and so much of the upside appears to be factored in.

Macquarie takes a different tack, seeing the acquisition as buying the bank some growth but providing little in the way of a strategic rationale. To Macquarie the complexity of the business is increasing not decreasing, with the bank owning and acquiring a variety of businesses such as medical equipment finance, computer/motor finance, insurance and a standalone online brand. Underlying growth is soft and that's what the broker's complaint is about. In the current environment a premium valuation coupled with an acquisition appetite can lead to earnings growth, but just how long this can last? Macquarie thinks, like Citi, the bank needs to pursue acquisitions to achieve growth and justify the premium at which it trades.

BA-Merrill Lynch expects the acquisition to be modestly accretive but thinks upside for Bank of Queensland is limited. The stock remains fundamentally attractive but has outperformed the sector by 8% since February and its comparative peer, Bendigo and Adelaide Bank ((BEN)), by 13%. It's all factored in, and Merrills downgrades to Neutral from Buy as a result. The broker prefers Mortgage Choice ((MOC)) outside of the major banks. This stock is a pure play on improving housing credit, an area where cyclical improvement in growth prospects should stand out against a fairly subdued outlook, in Merrills' opinion.

UBS thinks the stock offers solid growth opportunities but is no longer cheap. Hence a Neutral rating. Credit Suisse thinks the deal is strategically sensible and financially reasonable. It comes at a time when the bank has turned around its franchise but lacks momentum on the balance sheet and so "acquiring growth" will help. The broker also sticks with a Neutral rating, believing the deal will not be transforming for the bank.

FNArena's database shows brokers are of one mind on the stock, with seven Hold ratings. The consensus target is $12.25, suggesting 2.9% downside to the last share price. This has moved up from $11.67 ahead of the results. Targets range from $11.50 to $13.25. The dividend yield on FY14 estimates is 5.1% and on FY15 it's 5.6%.
 

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