August was a bad month for the financial sector generally, with the shares of banks, insurers and asset managers all falling more heavily than the 5% decline of the FTSE 100. Asset manager Standard Life Aberdeen (LSE: SLA) was one of the worst performers of the lot. Its shares slumped 17% over the month.
In this article, I’ll discuss why it performed so poorly, and its current valuation and prospects. Let’s start by summarising the key features of the month:
- Shares ended July at 298.8p.
- 7 August — H1 results (after weakness in the run-up to the results, the shares fell 7.5% on the day from 281.8p to 260.6p).
- 14 August — company announced it had sold £374m of shares in HDFC Life of India, reducing its stake in the insurer to 19.7% from 23%.
- 15 August — shares made a low for the month of 238.1p.
- 16 August — company announced a share buyback programme of up to £200m of shares by 16 January 2020.
- Shares rallied a little through the latter half of the month to end at 249.3p.
Disappointing results
SLA’s first-half numbers came in below City expectations. Assets under management increased 5% to £577.5bn, but this was thanks to favourable markets.
The group continued to see clients pulling cash from its funds, with net outflows of £15.9bn. This was an improvement on £16.9bn in the first half of last year, and £24bn in the second half, but worse than the £13.4bn the market had expected. A 10% drop in pre-tax profit to £280m also missed market expectations of £288m.
Moving in the right direction
Client withdrawals have dogged the company since Standard Life merged with Aberdeen in 2017. However, more positively, cost efficiencies from the merger are on track — £234m delivered so far of the £350m per annum targeted — and investment performance of the group’s funds has improved recently.
The company told us 65% of assets under management are now above benchmark over three years, compared with 50% at the end of 2018. Further improvement is needed, if outflows are to be reversed, particularly in the higher-margin equity and multi-asset funds where performance has been weakest. However, with overall performance moving in the right direction, and other areas of the group’s business doing well, including its financial adviser platforms, I can see cause for optimism.
Risk/reward
The company is well capitalised, with £0.9bn of surplus regulatory capital. It also has valuable non-core assets, such as the aforementioned stake in HDFC Life from which it realised £374m with the partial sale in August.
The strong balance sheet can support investment, share buybacks (the programme announced in August isn’t the first) and dividends for some time to come, even though the dividend is currently uncovered by earnings. The board’s intention is to hold the payout at 21.6p “while the business is restructured, cost synergies are delivered and future financial performance confirms the sustainability of this level of distribution and provides line of sight to its future growth.”
At the current share price, the yield on offer is 8.6%. Buyers of the stock today are paying 13.4 times this year’s forecast earnings, with City analysts expecting earnings growth to kick in next year. On balance, I think the risk/reward ratio here is favourable, and I rate SLA a ‘buy’.