AJ Bell’s consensus-beating annual figures hint at an uncomfortable feature of its business model. Interest generated on customers’ cash balances has provided a windfall for the investment platform provider.
Pre-tax profits last year were up by an annual 50 per cent, ahead of consensus expectations. That was partly the result of better cost-controls, but also higher revenue. The main driver of the 33 per cent rise in the latter was higher interest rates.
In the wake of new consumer duty rules being introduced in July, which require companies to deliver “good outcomes” for customers, it is likely to add to investors’ unease about any potential review into the rates paid to wealth management customers on their cash balances.
Investment platforms such as AJ Bell pass on some of the benefit of higher interest rates to customers, but not all. The result of the rapid rise in interest rates over the past 18 months has been a dramatic rise in revenue margins, which have expanded to 29.8 basis points over the 12 months, from 22.6 basis points a year earlier.
The revenue margin this year is also expected to be higher than previous guidance, up marginally on last year rather than flat. But higher interest rates are an unsustainable source of revenue growth. More value is attached to growth in assets under management, which attract recurring fees. That has slowed as the economic picture has worsened.
The pace of any recovery in the rate at which platforms can gather new funds will become even more important once the rapid rise in interest rates starts to fall away.
Organic growth is weaker than its history, a consequence of shakier investor confidence and rising pressures surrounding the cost of living that have depleted household savings. It is the reason for the drastic derating in wealth managers over the past two years, coupled with an easing of the lockdown trading boom.
However, to the surprise of Michael Summersgill, AJ Bell’s boss, it is the advised clients that have been more reticent to invest than those investing directly. Net inflows from advisers were just over 40 per cent lower last year, the consequence of more appealing, risk-free rates to be had by holding cash rather than investing in equities. Less M&A activity and a slower housing market, which can trigger a shift-around in wealth, have also weighed on new business.
The shares trade at 18 times forecast earnings, close to the lowest level in its five-year history on the London market. That is still higher than Hargreaves Lansdown, its larger peer, though, reflecting the latter’s slower organic growth and heavy investment over the next three years, which is expected to subdue profits.
The overall organic growth in AJ Bell’s assets amounted to 9 per cent last year, versus only 1.3 per cent for Hargreaves. Taking share is a less onerous task than that facing Hargreaves Lansdown, which has a dominant position equating to roughly 42 per cent of the investment platform market. For AJ Bell, market share stands at 6.9 per cent.
Analysts expect the pace of net inflows to accelerate this year, to £5.3 billion or about a quarter greater than last year. That is more optimistic than expectations for its larger rival, which is forecast to record £4.3 billion in net flows, down from £4.8 billion last year.
Like Hargreaves, AJ Bell is spending more heavily. Costs were up by about a quarter last year, but that was peak growth. Improving its technology, particularly the customer-facing areas of its online platform, has been the focus. But then cost growth should return to high-single-digit growth from the next financial year.
Profit growth is expected to slow over the next two years, but not to go backwards, as analysts have forecast for Hargreaves. AJ Bell’s path to recovery looks clearer.
Advice: Hold
Why: A cheap valuation compensates investors for slower organic growth
Games Workshop
The release of Leviathan, the latest edition of Games Workshop’s blowout Warhammer game, caused first-quarter sales to boom. But it also unleashed large expectations for the fantasy figurine specialist to grapple with during the second quarter.
A consensus-beating first quarter has not been repeated; instead sales growth has slowed. Revenue over the first half of the year is set to be £235 million, up from £212 million over the same period last year. Operating profit is expected to be about £82 million, up from £70.7 million. This implies second-quarter revenue growth of 7 per cent, compared with 14 per cent in the first quarter, according to an analysis by Jefferies, and a 17 per cent fall in pre-tax profits, against a 46 per cent jump in profits.
Warhammer fans are loyal but are not immune to cost of living pressures. As Jefferies points out, there is also the skewing effect of pull-forward of demand into the successful launch of the Warhammer 40,000 tenth edition earlier in the year.
The update pushed the shares back below the magic £100-mark. The fantasy titan has long attracted a premium, fitting of the stellar earnings growth. They now trade at just over 20 times forward earnings, a discount to the average since Kevin Rountree, the present boss, took over in 2015.
But that does not give enough credit to the progress made in diversifying the retailer’s revenue stream. Under Rountree’s tenure, revenue has grown at a compound annual rate of 18 per cent, while pre-tax profits have climbed by 39 per cent a year. The difference between the rates of expansion in the top and bottom lines is a result of a canny strategy to license its Warhammer brand to third parties through video games, television and merchandise. The retailer also has been pushing further into Asia, as it seeks to diversify geographically.
Analysts at Peel Hunt have forecast pre-tax profit growth of about 8 per cent this year to £185 million. Yet a further easing in inflation and a recovery in spending power among Warhammer’s diehard fan base could both see a return to form.
Advice: Buy
Why: The shares’ weakness represents an opportunity
