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Standard Life Aberdeen - Outflows hit profits

Nicholas Hyett | 13 March 2019 | A A A
Standard Life Aberdeen - Outflows hit profits

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Standard Life Aberdeen Plc Ordinary 13 61/6

Sell: 217.00 | Buy: 217.20 | Change -2.20 (-1.01%)
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Full year fee based revenue fell 11% at Standard Life Aberdeen (SLA) to £1.9bn. However, lower operating expenses and a boost from the group's joint ventures meant underlying operating profit before tax was down just 1.5%.

The board announced a final dividend of 14.3p, taking the total dividend to 21.6p - up 1.4% year-on-year.

The shares rose 2.5% in early trading.

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Our view

The merger of Standard Life and Aberdeen Asset Management was all about scale. Scale creates opportunities for cost savings, offsetting the pressure on fees from regulatory scrutiny and passive investment funds that have impacted margins across the wider industry.

Early signs aren't bad. Cost savings are running ahead of plan and a diversified distribution network also seems to be bearing fruit, with the financial adviser platforms performing well despite tough conditions in the institutional market.

That hasn't been enough to stop the money walking out the door though. The group lost 6.7% of total AUM to withdrawals in 2018, and recent market falls have compounded the pain.

Bulking up hasn't all been good news either. Lloyds is looking to withdraw the £100bn Scottish Widows mandate, previously managed by Aberdeen, over conflicts of interest with the expanded group. The portfolio represents 18% of SLA's total AUM, and while low margins mean it only accounts for something like 5% of revenues, it's still a significant loss.

The agreement to sell the remaining life business to Phoenix will go some way to rectifying the damage. It also completes the transformation from life insurer to fully fledged asset manager. A 20% stake in Phoenix should keep the assets under SLA's management, with potential to add more from elsewhere in the Phoenix portfolio as well.

The deal provided a £2.3bn cash injection and frees up capital currently restricted by regulatory requirements. Throw in around £380m from the sale of a small stake in Indian life insurer HDFC, and the group's got plenty of dry powder to fund growth or acquisitions.

Going forwards it's vital that the group stems the outflows that it has seen quarter after quarter. It's not being helped by the fact investment performance has been lacklustre.

Fortunately, we feel SLA has the tools to turn things around.

The combined group is less reliant on one or two investment areas than either of its predecessors. That should make it less exposed to investment fashions. The adviser platforms are performing well too, and Aberdeen has historically excelled selling to institutions, providing multiple routes to market. In the meantime, those cost savings are propping up profits.

With the group hoping to hold its dividend steady over the course of the transition that implies a yield of something like 8.5%.

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Full Year Results

SLA saw more investors withdrawing their money from funds than adding in 2018, with net outflows of £40.9bn. Market movements also went against the group knocking a further £20.5bn of total assets under management (AUM). Total AUM fell 9.3% year-on-year to £551.5bn.

Outflows were concentrated in higher margin GARS and equities products - with an outsized impact on revenues as a result. Overall revenue margin fell from 0.33% in 2017 to 0.308% in 2018.

However, there were bright spots - with continued growth across the group's retail platforms (which saw net inflows of £5.3bn) and alternative investment categories.

A 10% fall in operating expenses failed to offset weaker revenues, with operating profits down 13.7% as a result at £473m. The cost savings were driven by post-merger synergies and the sale of the UK and European insurance business.

SLA benefited from an 88% increase in profits from associates and joint ventures. That reflects the addition of a 19.98% stake in Phoenix, following the sale of the life insurance business, and a new joint venture with Virgin Money/CYBG.

The group intends to maintain the dividend at its 2018 level throughout the integration period.

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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 disclosure for more information.