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abrdn - revenue growth positive despite assets shrinking

Nicholas Hyett, Equity Analyst | 10 August 2021 | A A A
abrdn - revenue growth positive despite assets shrinking

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Abrdn plc Ordinary 13 61/6

Sell: 239.40 | Buy: 239.70 | Change -16.70 (-6.55%)
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abrdn, formerly Standard Life Aberdeen, reported fee-based revenues in the first half of £755m, up 7% year-on-year. That reflects strong growth in the advisory business, while positive market movements largely offset modest net outflows in assets under management and administration (AUMA).

Underlying operating profits rose 52.4% to £160m, as operating expense remained broadly flat year-on-year, and underlying earnings per share of 7.0p.

The group reported an interim dividend per share of 7.3p.

The shares were broadly unmoved in early trading.

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Our View

Asset management is a capital light business, meaning profits are free to fund acquisition growth or shareholder returns. All that matters is keeping enough assets under management to cover the fixed cost base.

The problem is that, so far at least, abrdn hasn't proven a terribly popular option for investors. Assets have been walking out the door for years - with another 1% of total assets making for the exit in the first half of 2021. Very positive market movements have made up for those outflows recently - but ultimately the group needs to encourage more investors that its funds are the place to leave their money.

Fortunately, there are signs the group might be turning a corner. A majority of the funds abrdn manages are now delivering investment returns ahead of their benchmark - a key requirement if investors are to be tempted back. It helps that funds across all the major investment categories means the group can cater to whatever happens to be flavour of the month with investors.

It might feel like ancient history, but the 2017 merger between Standard Life and Aberdeen Asset Management, which created abrdn, 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. That's been boosted further by the disposal of stakes in HDFC and Parmenion. But, with a dividend that's still not covered by profits, the group's relying on its reserves to keep shareholder returns flowing. The inflection in revenues management have scheduled for the coming years can't come soon enough.

A better investment performance, good retail distribution platforms and lower operating costs give abrdn all the tools it needs to make the most of its situation. However, the group has yet to resolve its fundamental problem with investors walking away. We'd like to see abrdn generating meaningful inflows and more progress on costs before turning more positive, especially when the valuation is this far above its long run average.

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abrdn key facts

  • Price/Earnings ratio: 23.2
  • 10 year average Price/Earnings ratio: 12.1
  • Prospective dividend yield (next 12 months): 5.0%

All ratios are sourced from Refinitiv. 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.

Half Year Results

abrdn reported a net outflow in AUMA the first quarter of £5.6b, a significant improvement on the £24.8bn outflow reported a year ago. Excluding flows relating to the highly volatile liquidity segment and exit from LBG, net outflows were £1.9bn. The decline was largely offset by market movements and as a result total AUMA was broadly unchanged at £532bn.

Operating expenses fell slightly from £601m in the first half of 2021 to £595m. As a result the group's cost:income ratio fell six percentage points to 79%.

abrdn's Investments business reported fees of £613m, up 5.5%, and operating profits of £126m, up 32.6%. That was despite AUM remaining unchanged year-on-year, and reflects higher performance fees, improved product mix and good cost control. Investment performance deteriorated slightly, with 65% of AUM ahead of benchmark over 1 and 5 years, and 66% ahead over 3 years.

The Advisory business reported fees of £87m, up 26.1%, with operating profits growing 60.9% to £37m. That reflects simplified arrangements with Phoenix Group which, which boosted revenues by £12m. The division reported a £2.0bn net inflow, with AUMA rising 7.5% to £72.0bn.

Personal reported fee revenues of £41m, up 7.9%, and operating profits of £4m compared to a £4m loss a year ago. AUMA rose £1bn to £14bn.

The group has achieved £382m of synergies since the merger between Standard Life and Aberdeen Asset Management, and is on course to deliver the full £400m target by the end of 2021.

The group reported a free cash outflow in the half of £132m. The group finished the half with surplus regulatory capital of £2.8bn, up from 2.3bn at the start of the year - with sales of HDFC and Parmenion offsetting the headwind from dividend payments and acquiring a stake in property manager Tritax.

Full year guidance remains unchanged.

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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 Refinitiv. 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.