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Standard Life Aberdeen - some signs of conditions steadying

Nicholas Hyett, Equity Analyst | 7 August 2020 | A A A
Standard Life Aberdeen - some signs of conditions steadying

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Abrdn plc Ordinary 13 61/6

Sell: 175.95 | Buy: 176.10 | Change 2.75 (1.59%)
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Standard Life Aberdeen (SLA) reported fee based revenue of £706m in the first half, down 13.4% year-on-year. That reflects asset withdrawals and changes in asset mix - although outflows have moderated more recently. Underlying profit before tax fell 30.4% to £195m.

The group announced an interim dividend of 7.3p per share, in line with last year's payment.

The shares were broadly unmoved following the announcement.

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Our view

Having sold off most of its insurance businesses SLA is, first and foremost, an asset manager.

We can see the reasons for the switch. Asset management is less capital intensive than life insurance, freeing up cash to fund shareholder returns. A product range that embraces most of the major asset classes should reduce the group's exposure to investment fashions too.

The problem is that, so far at least, SLA hasn't proven a terribly popular option for investors. Over 10% of assets walked out the door in 2019, and while most of that was down to the end of the Lloyds relationship a sizeable chunk wasn't. To make matters worse outflows are concentrated in the more lucrative equity and multi-asset funds, and that's depressing margins.

The fact SLA's struggled to hold onto funds isn't altogether a surprise. Until recently 69% of the group's equity funds had underperformed their benchmarks over five years. That makes the funds a tough sell. Passive alternatives are not only cheaper, in recent years they would have performed better too.

However, there are some early signs of progress. The group's funds have weathered the current crisis rather well and that's helped performance. Take Lloyds out of the equation and the group's even seeing inflows, although a shift from equity to cash funds continues to weigh on margins.

The merger between Standard Life and Aberdeen Asset Management continues to drive cost savings. Together with other efficiencies that's allowed the group take steps to make pricing more competitive. Lower pricing will ultimately benefit the advisory platforms which are already gathering assets nicely. In the long run we think retail investors probably provide a relatively stable source of assets for the group.

With several billion pounds from life insurance sales in the bank, plus the release capital previously restricted by regulatory requirements, the group's got plenty of cash on hand. However, commentary around the dividend at the half year stage suggests to us that incoming CEO Stephen Bird might have plans for the extra firepower and investors should probably brace themselves for a dividend cut.

A better investment performance, good retail distribution platforms and lower operating costs give SLA all the tools it needs to make the most of its situation. However, the group still has to contend with the rise of passive investment alternatives and the pricing pressure that comes with it. With considerable dry powder on hand we await Bird's plans to address those challenges with interest.

Standard Life Aberdeen key facts

  • Price/Earnings ratio: 17.3
  • 10 year average Price/Earnings ratio: 11.2
  • Prospective yield: 7.6%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

Total assets under management or administration at the end of the half stood at £511.8bn, down from £544.6bn a year ago. That reflects a total net outflow of £24.8bn, however that was entirely down to the withdrawal of Scottish Widows assets by Lloyds Bank without which the group would have reported a modest net inflow of £0.1bn.

The decline in revenue was driven by weaker results from institutional clients, as clients moved out of high margin equity and multi-asset investments into cash and high liquidity investments. This was moderated by more modest revenue declines from retail clients, as AUM continued to grow thanks to a combination of acquisitions and inflows.

Investment performance improved year-on-year with 68% of assets under management (AUM) delivering an above benchmark return over 3 years. That reflects improvements in performance in equities, but also the shift in AUM towards more successful cash products.

Operating expenses fell 10.7% year-on-year to £601m, reflecting synergies from the Standard Life/Aberdeen Asset Management merger and other efficiency savings.

SLA reported profit before tax from its asset management, platform and wealth businesses of £114m, with a further £81m from insurance associated and joint ventures (down 10% year-on-year).

The group's regulatory capital surplus increased slightly to £1.8bn, from £1.7bn during the year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

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