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Standard Life - Progress against a volatile backdrop

Nicholas Hyett | 9 August 2016 | A A A
Standard Life - Progress against a volatile backdrop

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Standard Life have this morning released results for the first half. The shares rose 4% in morning trading as operating profits before tax rose 18% to £341m, with underlying cash generation improving 10% to £254m.

Diluted earnings per share for the half was 13.5p, up 16%, while the dividend rises 7.5% to 6.47p per share. The Group Solvency II ratio of at the end of the half was 154% (H115: 162%), with surplus capital of £2.2bn (H115: £2.1bn).

Both major divisions delivered growth in profits. Standard Life Investments saw underlying profits increase 14% to £176m and UK Pensions and Savings grew 7% to £151m.

Group assets under administration (AUA) increased 7% to £328bn helped by net inflows of £0.9bn (H115: £3.4bn). Growth was driven by £2bn of net inflows in the Institutional business, taking total AUM in the business to £78.1bn, offsetting net outflows of £0.4bn in the £47.3bn Wholesale business. The Workplace and Retail channels continue to perform well with net inflows of £2.1bn on the advisor 'Wrap' platform (up 3%) and regular contribution into workplace pensions of £1.5bn (up 4%).

Standard Life has increased its stake in Indian insurer HDFC Life (at a cost of £179m) ahead of the latter's combination with Max Life. Standard life will hold 24.1% of the combined group.

Outlook:

The group expects levels of uncertainty to remain high going forwards. Group CEO Keith Skeoch said that he would continue the group's "Targeted investments to further our diversification agenda, together with a sharpened focus on operational efficiency as we drive our cost income ratio to significantly below its current level."

Our view:

Standard Life has transformed itself over the last fifteen years or so from a traditional life insurer to a fee-based asset manager. The group now has two main business lines - Standard Life Investments (SLI), which offers a range of active and passively managed funds; and a UK savings and pensions business. The latter includes the Wrap platform for financial advisers and the group's corporate pensions proposition, both of which provide a strong distribution platform to channel inflows into SLI.

Standard Life is benefitting from some favourable trends, such as the on-going shift from defined benefit to defined contribution pension schemes, and auto-enrolment (by 2018 all UK employers will need to provide a qualifying workplace pension for eligible employees).

The Group's annuity sales were sharply lower in 2015, as a result of recent pension reforms. However, these changes could benefit the group in the long run, by increasing demand for alternative pension arrangements such as income drawdown. This should allow the company to retain more assets on its platform when customers come to retirement.

The shares took a pummelling in the immediate aftermath of the referendum, along with the rest of the sector, but have now recovered much of those losses as investors relax about the state of industry balance sheets. The Group continues to actively diversify away from it's solely UK heritage, a move that is only likely to increase following the vote. In particular SLI are increasingly targeting global institutional investors while the increased investment in India looks to replicate some of Prudential's success in offering financial services to rapidly growing Emerging Markets.

As the group increasingly focuses on asset management it will become more exposed to market performance, with falls feeding through to AUM and thus fee income. For now though the Company is enjoying the boost to stock market valuations provided by lower interest rates, and that is supporting a yield of 6.3% for FY16, rising to 7.1% by FY18, on current analyst estimates.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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