In 2017 the Boards of Standard Life and Aberdeen Asset Management announced that they had reached agreement on an all-share merger of the two businesses.
At the time the combined Group’s leadership heralded the “compelling strategic and financial rationale” of the merger, saying that they believed it would: (i) Harness complementary market-leading investment and savings capabilities”; (ii) Reinforce both entities’ long-standing commitment to active management, underpinned by fundamental research; (iii) Establish one of the largest and most sophisticated investment solutions offerings globally; (iv) Create an investment group with strong brands, leading institutional and wholesale distribution franchises, market leading platforms and access to long-standing strategic partnerships; (v) Bring scale; (vi) Deliver through increased diversification an enhanced revenue, cash flow and earning profile; and (vii) Result in material earnings accretion.
A presentation in August 2017 (marking the completion of the merger) titled: “Creating a Diversified World-Class Investment Company” further set out the Standard Life Aberdeen proposition. Management saw clear benefits across distribution (50 offices with customers across 80 countries), augmented by minimal client overlap; breadth and depth of talent with more than 1,000 investment professionals; scale to invest in proposition; and financial benefits. The Group targeted £200m of synergies from the merger. At the time of the presentation Standard Life Aberdeen reported AUM of £583bn, broken down as follows: Equities £159bn; Fixed Income £181bn; Solutions (Absolute Return, Quant, Multi-Asset etc.) £180bn; and Real Estate & Private Markets of £63bn, and AUA of £670bn.
The shares closed at 493p the day before (i.e. 13 August 2017) that presentation. On 14 October 2022 the shares closed at c.140p.
As implied by the share price performance, the merged Group has had a bumpy first five years. In FY 2018, its first full year post-merger, it took an £880m goodwill impairment charge, “based on the prevailing market conditions”. This was followed by another impairment charge of £1,569m in FY 2019, reflecting: “the impact of 2019 net outflows, market conditions and competitive pricing on future revenue projections and excludes expected significant benefits from planned future expense savings”. In FY 2020 the Group booked another impairment charge, this time of £915m, attributed to “the impact on reported revenue and future revenue projections of global equity market falls and a change in mix with a higher proportion of lower margin assets”. Following that write-down, the asset management goodwill is now fully impaired.
Administration charges, excluding restructuring and impairments, were £1,746m in FY 2018. This had improved to £1,198m in FY 2021, although the benefits from this were overshadowed by net operating revenue also having contracted (from £2,131m to £1,543m) over the same period. Abrdn’s AUMA at end-H1 2022 was £508bn.
What is management doing to arrest these trends?
As I see it, there are three distinct strategic actions – new lines, costs and shedding non-core assets.
On new lines, there have been three interesting acquisitions by the Group. In December 2020 the Group took a 60% stake in the leading logistics real estate manager, Tritax, to strengthen its property offering. Tritax’s AUM has grown since then from £5bn to £7.7bn (as at end-June 2022). In May 2022 the Group closed the £1.5bn acquisition of ii (interactive investor) which was an excellent use of surplus regulatory capital (which had stood at £1.8bn at end-2021). ii has a really strong franchise, with £55bn of AUMA (more than a tenth of the Group total) at end-June; a 20% market share with over 400,000 customers who have average AUA of £145k. In addition, on 29 October 2021, Abrdn purchased 100% of the issued share capital of the investing insights platform Finimize.
With a H1 2022 cost/income ratio of 83%, it is no surprise that costs are a key focus for management. The previous target of a 70% C/I ratio by the end of 2023 has been vacated, but given the delta between earnings and the dividend – and the extent to which revenues are beyond management’s control – costs are the primary area where management can ‘control the controllables’.
Management is targeting net cost savings of £75m by 2024 from: (i) Fund rationalisation, with c.110 of ABDN’s 550 funds targeted for merger or closure; (ii) Equity and multi-asset solutions transformation; (iii) Non-core disposals; (iv) Single middle office operating model; and (v) Management de-layering.
The Group has been monetising non-core stakes in two Indian associated businesses. In September, ABDN sold £262m worth of shares in HDFC Life Insurance Company. The previous month it sold off £225m of shares in the HDFC Asset Management Company. ABDN still has a 1.66% stake in HDFC Life Insurance Company and owns 10.21% of HDFC Asset Management Company.
By my maths, the market value of ABDN’s stake in HDFC AMC is £449m, while its stake in HDFC Life is worth £202m. ABDN also owns 10.4% of the UK listed Phoenix Group, with that stake worth c.£550m.
These interests in other listed companies complicate the ABDN investment story. The combined value of those shareholdings is £1.2bn, or 40% of the ABDN market cap. Management guide that they will continue to monetise the Indian stakes, which will make the story a little simpler.
Apart from simplification, there is another key angle to the disposals. These are important when considering shareholder distributions.
The Group’s dividend policy is “set at the level of 14.6p per annum until it is covered at least 1.5 times by adjusted capital generation, with the objective of growing the dividend in line with [the Board’s] assessment of the medium term growth in profitability”. Bloomberg consensus doesn’t see earnings climbing above 14.6p until 2025, however. Sure, earnings is not (I stress) the same as ABDN’s measure of adjusted capital generation, but optically EPS < DPS isn’t a good look.
Complicating the picture further, in July the Group announced the commencement of a programme to return £300m to shareholders through share buybacks, starting with a first phase of up to £150m (which will run to no later than the calendar year end).
The collapse in the ABDN share price means that the stock now yields a little more than 10%, so either the market has this wrong and the stock is a buy for investors looking for high income, or there’s a risk that the dividend will be cut, or something else entirely. Which is it?
There are a couple of moving parts here. Taking disclosures on total voting rights, the Group had 2.2bn shares in issue at the start of this year, implying an annual cash dividend cost of £318m on the basis of the 14.6p dividend guidance.
By the end of September, the share buyback programme has pared the share count by 58m shares, saving £8.5m a year in dividends. A back of the envelope calculation suggests that ABDN was about two-thirds of the way through the initial tranche of £150m by end-September, so that implies savings once the first tranche concludes of c.£13m. Let’s double that for the second £150m and (very crudely) you knock about £25m a year off the annualised dividend.
So, the pro-forma dividend cost is £293m. Bloomberg consensus, shown below, gives net income of £179m for 2023 and £237m for 2024. Combined earnings of £416m for the two years which very simplistically implies a notional ‘gap’ of £171m (again, this is based off statutory earnings – ABDN uses adjusted capital generation as its key metric here) that needs to be solved for from (say) reserves or through ongoing divestments of the Indian investments that the Group holds.
Sure, I’m keeping things very simple here and disregarding all of the other moving parts when it comes to regulatory capital. But it is noteworthy that ABDN had a regulatory capital surplus of £0.6bn at end-June 2022, so – assuming the analyst consensus is close to the mark – this £0.6bn surplus can cover the notional £171m uncovered (I stress that this is on my numbers, calculated on the basis of statutory earnings minus pro-forma dividends, and ignoring everything else, including ABDN’s own approach to calculating capital generation) dividends for 2023 and 2024 (i.e. up to 2025, when earnings are forecast to more than cover the dividend) and also close out the remaining part of the £300m share buyback programme.
In short, barring any major unforeseen shocks, I’m comfortable about the outlook for the dividend.
So what is my take when it comes to ABDN?
For starters, as someone who bought the stock in November 2021, I’ve been ‘long and wrong’. Market performance has dragged down virtually all asset managers. But when the market turns, asset managers like ABDN should outperform given how geared they are to market performance.
There are a number of turn-offs in the ABDN story that management will need to address. Firstly, it’s complicated. As I mentioned, 40% of its market cap relates to shareholdings in other plcs. That will reduce over time, however, as management intends to sell off the two listed Indian investments. Secondly, the cost / income ratio at 83% is way too high. Shrinking the fund count from 550 funds to c.440 funds is a good start, but I question whether the Group really needs to offer a menu of 440 funds to investors. There might be deeper cuts to come. Thirdly, management needs to arrest the declining trend in AUMA – that task won’t be helped by the rationalisation of funds in the short term, as this is likely to involve some leakages. Fourthly, the dividend. For the reasons I’ve set out above, my hunch is that it’s safe. Bloomberg consensus suggests that most analysts agree with me on the dividend – sure, the consensus is 14.6p for 2022, 14.3p for 2023, 14.2p for 2024 and 14.6p for 2025 – the latter being the year in which earnings will rise above the target DPS. But within the 2023 and 2024 ‘consensus’ there’s clearly a lot of analysts penciling in 14.6p (i.e. flat dividends) as surely nobody is expecting near-term dividend growth given the market backdrop.
All in all, my instinct is to stick with ABDN. It is throwing off a good dividend – which will compensate my patience, it has made some canny acquisitions and it has a strong distribution network that leaves it well placed when the eventual upturn comes. However, I don’t see a need to top up the position in it (or indeed any of my other asset manager plays) just yet. There’s just too much uncertainty in the global markets at this time.
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