Asset managers have nowhere to hide from falling markets, but Abrdn entered this year’s downturn on the back foot. The core investment management business continued to lose assets as clients pulled their cash and it wrestled with negative market performance, which sent assets under management for that division down by £78 billion to £464 billion.
The result? Group adjusted operating profits missed analysts’ consensus as fee-based revenue earned on assets under management and administration fell by a worse-than-anticipated 8 per cent. The worst news? A target to cut the key cost/income ratio to 70 per cent by the end of next year has been pushed back. Until when? Who knows.
Based upon the earnings potential, the shares look pricey at almost 20 times forward earnings. That is at a premium to the sector. Owning a stake in two India-listed financial services businesses, worth £1.1 billion at the end of June, plays a big part in the Abrdn premium. Management intends to sell-down those stakes and return a “substantial” portion of the proceeds to shareholders. Given the depressed share price, buybacks seem the most likely method.
Yet strip out the value of those two stakes — which the brokerage Numis puts at an aggregate £987 million — and that still merely brings Abrdn’s forward earnings multiple back into line with other listed asset managers. Given the challenges in stemming net outflows and a higher level of fixed costs, that hardly seems compelling.
Stephen Bird, the chief executive, calls the £3.8 billion in net outflows sustained by the group during the first six months of the year “very creditable”. If Abrdn were an asset manager that had not suffered six consecutive years of net outflows prior to the market tumult of the first half, investors might be more inclined to cut the group some slack.
A weaker performance from the group’s fund managers will hardly entice investors to stick around. Even on a five-year basis, only 61 per cent of assets under management were ahead of benchmarks, down from 67 per cent over the course of last year.
Market chaos leaves the prospect of clawing back revenue from the investment management business this year highly uncertain, but achieving cuts in costs is no surefire bet either. A net £75 million in savings is being targeted by 2024, the bulk of which is expected to come from cutting headcount by closing or merging roughly 110 funds. But this year alone, the bill for restructuring costs is expected to be £150 million.
A higher proportion of fixed costs than rivals means Abrdn’s cost base flexes less easily when revenue falls. Variable pay costs may have fallen during the first half, but that only accounted for 13 per cent of the staff bill, and staff account for just over half of adjusted operating expenses.
Abrdn stresses efforts to diversify its income stream away from reliance on asset management and towards wealth management and advice. The £1.5 billion acquisition of the investment platform Interactive Investor (II) this year was a stride towards that. That business grew adjusted operating profit by 47 per cent over the first six months of the year, even if Abrdn only benefited from one month’s ownership.
II charges fees at a flat rate rather than as 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 only accounted for 36 per cent of the total fee-based revenue generated by that business during the first half, while trading transactions accounted for 45 per cent. II is not immune from weakening investor confidence.
Abrdn’s problems stretch far beyond the recent market downturn.
ADVICE Avoid
WHY Without the cost/income ratio improving it seems unlikely the shares will sustainably rerate
IWG
Recovering occupancy has been a lengthy enough slog for the office provider IWG, which operates the Regus and Spaces brands. Rising inflation and looming recessions across global economies threaten to push the group’s rehabilitation back even further.
Even with revenue ahead by more than a fifth, lockdowns in China and inflationary cost pressures meant profits came in behind analyst expectations during the first half of the year. The adjusted operating loss might have improved to £36 million, but that was behind the £25 million profit forecast by RBC Capital.
Cost inflation meant the savings that management and investors hoped for did not materialise in the first half. Against the same period last year, overheads were almost £30 million higher. Unsurprisingly, costs are expected to rise again during the second half of the year, but funding daily operations isn’t the only source of cost pressure.
Less than half the group’s debt is at a fixed rate, which means that rising interest rates could add up to £8 million in extra finance expenses in the second half, management says. That’s even after a planned reduction in net debt, which climbed to £741 million at the end of June, from £397 million at the end of December, after the acquisition of a flexible workspace rival, The Instant Group.
The service level margin had improved to between 23 and 24 per cent by June but was still below the historic norm. Mark Dixon, the chief executive and founder, reckons the group can get back to a target margin of 30 per cent at some point next year as occupancy, rent pricing and services income recovers.
Occupancy had risen to just over 75 per cent on centres opened prior to 2021 and inflation has helped boost pricing ahead of pre-pandemic levels, but an impending recession brings with it the risk that businesses take less space and cut back on optional extras like catering.
A shift towards operating centres on a managed or franchised basis, rather than owning the properties, could help boost the group’s return on capital employed and win back investors in the medium term. Yet missing market expectations over the first half means earnings downgrades from analysts seem incoming.
ADVICE Avoid
WHY Weaker confidence and cost inflation
