Abrdn plc (ABDN) Ordinary 13 61/63p
HL comment (1 March 2022)
abrdn, formerly Standard Life Aberdeen, reported full year fee-based revenues of £1.5bn, up from £1.4bn last year. Assets under management and administration (AUMA) rose 1.3% to £542m, as positive market movements offset a net outflow of £6.2m. Underlying operating profits rose 47.5% to £323m.
The £1.49bn acquisition of subscription-based investment platform, interactive investor, is expected to complete by the middle of the new financial year. The deal is subject to shareholder and regulatory approvals.
A final dividend of 7.3p was announced, taking the full year payment to 14.6p per share, in-line with last year.
Looking ahead, the group said ''The current conflict between Russia and Ukraine is already impacting markets and operations and is likely to have substantial economic consequences''.
The shares fell 3.4% following the announcement.
Increased market uncertainty because of the Ukraine crisis is likely to result in ups and downs over the short-to-medium term. That's because as an asset manager, market movements have a direct effect on performance.
Away from the bigger political picture, it's important to look at the long term investment case.
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 positive market movements making up for net outflows this year. But ultimately the group needs to encourage more investors that its funds are the place to leave their money. Given its Environmental, Social and Governance (ESG) options currently lag peers, and demand for ESG investments is on the rise, this may be a difficult task.
Fortunately, the majority of the funds abrdn manages have been able to deliver investment returns ahead of their benchmark - a key requirement if investors are to be tempted back. Offering 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 to 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. It's this that's behind the potential takeover of Interactive Investor, which is one of the UK's biggest direct-to-consumer investment platforms.
If the deal goes ahead, we think the idea has merit. It fits with abrdn's strategy to build scale and improve its own direct-to-consumer offering. Taking on an established platform is, in theory, a sensible and faster way to do this. As ever with any large-scale takeovers, there will be a reasonable amount of execution risk. Integrating a company of that size doesn't come without its pitfalls.
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, meaning acquisitions don't come with as much of a funding headache. 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, and the current market environment remains highly uncertain.
abrdn key facts
- Price/Earnings ratio: 14.8
- 10 year average Price/Earnings ratio: 12.6
- Prospective dividend yield (next 12 months): 7.1%
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.
Full year results (profit figures are underlying)
Excluding flows relating to the highly volatile liquidity segment and exit from Lloyds Banking Group, net outflows were £3.2bn, down from £12.3bn.
Underlying operating expenses of £1.2bn were down slightly on last year, and the group had a cost:income ratio of 79%, down from 85%. The group said this is "not yet where it needs to be, but showing progress in Asia, the Americas and EMEA".
abrdn's Investments business - the largest segment- reported fees of £1.2bn, up 4.7%. This was helped by "favourable" market levels, and a £16m increase in performance fees to £46m. Operating profit was £253m compared to £186m, thanks to the higher revenue and a 1% reduction in costs. Assets under management rose 1.5% to £464m. 57% of AUM outperformed its benchmark, rising to 67% on a three- and five-year basis.
The group's working on simplifying its operations and increasing efficiency through increased automation.
The Advisory business reported fees of £178m, up from £137m as assets under administration (AUA) rose £9m to £76bn and higher net inflows of £3.9bn, partly reflecting higher market levels. There was also a £25m benefit from the simplification of abrdn's strategic partnership with Phoenix. Operating profit rose from £48m to £74m.
Personal reported fee revenues of £92m, up 15%. That fed into operating profits of £8m compared to a £5m loss a year ago. AUMA rose £1bn to £14bn. This division is where Interactive Investor would sit, should the deal go ahead.
The group has delivered on its target of achieving £400m in annual synergies by the end of 2021. The group reported a small free cash inflow of £2m. There were cash and cash equivalents of £1.9bn as at the end of December.
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 disclosure for more information.
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