When Standard Life (LSE: STAN) announced it had reached an agreement to merge with Aberdeen Asset Management in March 2017, the companies’ managements claimed this would be a new era for the enlarged group, using its massive size to dominate the global investment landscape.
Indeed, when the deal completed in the third quarter of 2017, Standard Life Aberdeen was the second largest fund manager in Europe with nearly £700bn in asset under management.
Vanishing growth
Unfortunately, almost immediately after the deal completed, analysts started to raise concerns about the new company’s trajectory. Then, at the beginning of 2018, in its first financial report as a combined entity, Standard reported that investors had yanked a total of £31bn from its funds in 2017.
To add insult to injury, a few months after, two of the groups largest clients, Scottish Widows and Lloyds Bank announced they were withdrawing their mandates worth £109bn from Standard due to competition concerns.
Luckily for Standard, Lloyds has now been told it cannot pull the funds before the end of its current contract in 2022, so it’ll have to keep paying Standard its £129m annual management fee until then. However, many of Standard’s other investors are not tied in with similar rules and have continued to leave in droves. The firm suffered £41bn of outflows in 2018.
This investor exodus has had a disastrous impact on the asset manager’s share price. Even after taking dividends into account, the stock underperformed the FTSE 100 by 35% last year and, a few months ago, the shares hit an eight-year low.
Recovery play?
Can the Standard Life share price ever recover from this slump? I think it’s improbable. Since the company hit its all-time high of 640p at the beginning of 2015, there have been some substantial changes to the group, including the merger with Aberdeen and the sale of its legacy insurance business.
The company is now pure-play asset manager which has higher margins and less onerous capital requirements. But earnings are more unpredictable — especially when assets under management seem to be flying out the door.
What’s more, unless the company can conjure up some rapid growth over the next few years, right now the shares look fairly valued to me.
Fair value
The stock is currently dealing at a forward P/E or 13, which isn’t particularly expensive, but it’s not particularly cheap either. The rest of the financial services industry in the UK is trading at a median earnings multiple of 13.9 and, on that basis, Standard is slightly undervalued.
On top of this, the company’s current dividend payout isn’t covered by earnings per share, so I think that lucrative 8.4% dividend yield is on shaky ground. I wouldn’t be surprised if management decides to reduce the distribution by around 25% over the next 12-24 months to balance the books.
So overall, I don’t think the Standard Life share price can recover to previous highs, although I don’t think it will drop much further either.
