The evolution of Abrdn over the past five years has resulted in epic destruction of shareholder value. Even after the tentative rally in recent weeks that has pushed the group back into the FTSE 100, the shares have lost more than half their value since the tie-up between Standard Life and Aberdeen Asset Management in 2017, a slide that preceded double-digit inflation, the war in Ukraine and the pandemic.
Convincing the market that it is more wealth management-cum-advice platform than bog-standard asset manager is the best chance Stephen Bird, the Abrdn chief executive, has for a recovery in the shares. But persuading investors to look past the heavy outflows from its investment business and higher cost base than peers is a big ask.
What is behind the rally? Some investors might have an eye on Interactive Investor (II), the investment platform Abrdn acquired for £1.5 billion this year. Rising interest rates should lift the return II makes on cash in client accounts.
Analysts at the brokerage Numis think a higher margin on cash will contribute £40 million in the second half of this year and £57 million during the first six months of next, up on the £17 million generated in the first half of this year.
But that benefit needs to be balanced against the negative knock-ons from higher interest rates, including fluctuations in stock markets and worsening investor confidence, both of which could damage revenue generated by II. Yes, the investment platform charges fees at a flat rate rather than a percentage of a customer’s assets, which means revenue is less at the mercy of fluctuations in the level of cash in client accounts. But account fees made up only 36 per cent of the fee-based revenue generated by II in the first half, while trading transactions accounted for 45 per cent. That is apart from the dent that higher inflation and rising rates have on assets held by the core investment management business.
The upshot? The actual benefit to II’s profit from higher rates will be a “marginal” positive to Abrdn as a whole, the broker Numis says. Even after buying II, it forecasts a group operating profit of £303 million next year, up on the £287 million it expects this year, but way behind the £323 million recorded last year.
Investment management is still the biggest contributor to profits. Even after accounting for II as if it had been owned for the full six months, the asset management business made just over half of adjusted operating profit. Based on forecasts by Numis for next year, the investment business will still account for the biggest chunk of profits. Investors pulled £37.3 billion in assets during the period, which put flows in negative territory at a group level. The aim of reducing the cost-income ratio to 70 per cent by the end of next year, from 84 per cent in the first half, has been scrapped.
With all that in mind, a forward p/e ratio of almost 21 makes the shares seem exorbitant. But that premium against asset management peers partly reflects Abrdn’s stake in two India-listed financial services businesses, worth £1.1 billion at the end of June, and a 10 per cent holding in London-listed insurance company Phoenix. Management intends to sell-down those stakes and return a “substantial” portion of the proceeds to investors which could earn Abrdn favour with the market.
Excluding those three holdings, which Numis values at a combined £1.2 billion or 60p a share, leaves the shares priced at ten times forward earnings, a discount to rivals including Schroders, Jupiter Fund Management and Ninety One. But that does not make Abrdn a bargain.
ADVICE Avoid
WHY Without the company stemming heavy outflows from the investment business, it seems unlikely the shares will sustainably move higher
Impax Asset Management
The sustainable investment house Impax Asset Management had acquired the same racy valuation as the stocks it has a penchant for. At their peak, the shares were priced at almost 42 times forward earnings and have since derated to a multiple of 18, a touch below the 10-year average. That belies the stark resilience of inflows compared with peers across the sector and growing proportion of stickier institutional assets.
Net inflows totalled almost £2.9 billion over the 12 months to the end of September, after suffering only one quarter of negative flows amid the market tumult of the past year. New business helped mitigate market and currency movements losses that wiped £4.4 billion from the manager’s assets under management, which declined only 4 per cent on the previous year. The result? Adjusted operating profits came in ahead of analyst expectations, up just over a fifth.
Paying out a higher proportion of post-tax profits, 65 per cent, meant the dividend this year will total 27.6p, which leaves the shares offering a decent dividend yield of 3.6 per cent at the current price. Even after the payout, net cash of just over £100 million on the balance sheet means there is plenty of firepower for potential acquisitions. Bolt-on deals in the private markets and fixed income spaces are most likely.
In the UK asset management industry, not a corporate presentation goes by without lip service to environmental, social and governance (ESG) issues. About 40 per cent of Impax’s assets under management are investments made by institutions, less prone to panic selling in a downturn than retail investors placing cash in mutual funds. Institutional investors are a segment Impax is looking to court.
Analysts at Berenberg expect the group’s operating margin to take a hit this year as it absorbs the costs of a larger staff, before returning to the 38.5 per cent-mark next year.
A bias towards growth stocks rather than cheaply rated value names might weigh on investment performance in the coming months. But flows into funds with a more easily-proven ESG-bent seem unlikely to abate.
ADVICE Buy
WHY A cheaper valuation doesn’t reflect the company’s organic growth potential
