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Standard Life Aberdeen completes merger - company update

Nicholas Hyett | 15 August 2017 | A A A
Standard Life Aberdeen completes merger - company update

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Standard Life and Aberdeen Asset Management completed their merger on the 14th August.

Our View

Standard Life has been transforming itself from life insurer to asset manager in recent years. That's stood it in good stead since the government turned the pensions market on its head, scrapping the requirement for pensioners to buy an annuity.

Meanwhile Aberdeen's assets under management (AUM) of a shade over £300bn meant it was big, but no giant by global standards. In an industry where size matters, both to reduce average costs and increase cross-selling opportunities, that put it in the 'buy or be bought' category.

The merger solves Aberdeen's issues of scale while also propelling Standard Life into the big league, creating the UK's largest active manager and aiming to deliver £200m in annual cost savings. With £660bn in AUM the group is also the second largest in Europe.

Aberdeen's specialism in emerging markets should mean its funds fit well alongside Standard Life's more vanilla products. A wider range of in-house funds increases the attraction of Standard Life's retail and corporate pension platforms, and provides Aberdeen with a more direct route to market. With just 8% crossover between the two groups' top 50 clients, Aberdeen's institutional clients could be of interest to Standard Life's sales team as well.

With Aberdeen having suffered 16 successive quarters of outflows, and Standard Life also struggling to hold on to assets, effective cross-selling and reversing recent outflows is key in the long run.

Importantly, the new group will be less reliant on either the huge Global Absolute Return Strategies (GARS) fund or emerging markets than its constituent parts used to be. While both will still go in and out of favour with investors, given their different risk profiles hopefully that won't happen at the same time!

For now, cost savings should support profit growth, and the combined group expects to offer a progressive dividend policy, growing from a base of 19.82p for the 2016 financial year. However, large scale M&A always comes with risks.

Standard Life First Half Results - 08/08/17

First half operating profit before tax rose 6% to £362m with underlying cash generation up 1% to £256m. The interim dividend rose 8.2% to 7p per share.

The shares fell 1.6% following the announcement.

Assets Under Administration (AUA) finished the first half up 1% at £361.9bn, as market movements offset a £3.7bn net outflow.

The net outflow represents increased withdrawals from the giant GARS fund of £5.6bn, where a poor investment result in 2016 continued to weigh on performance. This was partially offset by a 32% increase in net inflows elsewhere in the Institutional and Wholesale business of £1.2bn.

The Workplace and Retail business saw net inflows of £4.2bn, with record inflows into the Wrap and Elevate adviser platforms, where AUA rose 11% to £49.2bn.

Fee based revenue from AUA rose 5% in the quarter, to £836m, and now accounts for 94.5% of total income. Expenses rose 2.7% to £581m, with the cost to income ratio remaining stable at 62%. Standard life is planning to publically list its Indian joint venture, selling up to 5.43 percentage points of its 35% stake.

The Solvency II ratio, a measure of capitalisation for insurers, stood at 182%.

Aberdeen Asset Management First Half Results - 22/06/17

A combination of rising markets and favourable currency moves helped first half net revenue grow by 10.6% to £534.9m. This growth, combined with the completion of the £70m p.a. cost saving initiatives, helped Aberdeen deliver earnings growth of 19.9% in the period. The interim dividend is held flat at 7.5p per share.

The shares rose 3.2% on the news.

Assets under management (AUM) dipped £4bn to £308.1bn during the half. A £15.1bn tailwind from markets, performance & foreign exchange was more than offset by outflows and business rationalisations, including the withdrawal from core and core plus mandates in the US fixed income division.

The group saw outflows of £13.4bn in the first half. Outflows in Q2 were £2.9bn, much lower than the £10.5bn in Q1, which included two large redemptions totalling £4.2bn.

These redemptions contributed to equity fund outflows of £8.6bn in the half (H116 £9.8bn). Fixed income and multi asset flows continued to be impacted by structural outflows from insurance clients. The group remains wary of geo-political issues bringing continued uncertainty, but says emerging market equities have shown encouraging progress in the second quarter, and that overall, new business is being won at higher margins than is being lost on outflows.

Aberdeen's cash conversion remains strong, with operating cash flow of £152.9m, helping its net cash position improve from £401.4m to £498m, with the headroom above regulatory capital requirements increasing to £75.2m.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.