AJ Bell (AJB) – Still looking good

AJ Bell (AJB) – Still looking good

AJ Bell (AJB) successfully listed on 6 December at 160p and currently trades at close to 255p. The company will issue a first quarter trading update on 23 January. While its market valuation has increased, the long-term outlook remains promising.

In my last look at AJ Bell (latest share price 255p, market cap £1 billion) I highlighted the valuation gap with Hargreaves Lansdown (HL.). The two firms are now trading on the same forward (rolling) P/E multiple of circa 32X.

Hargreaves Lansdown is the UK leader in the DIY (Do It Yourself) investor segment with around a 40% share of assets. AJ Bell is a relatively small player in this area – under its Youinvest brand – but is growing rapidly.

Recent updates highlight AJ Bell’s efforts to make itself more attractive fo DIY investors.  In mid-December the group launched AJ Bell Ready Made Portfolios and the group has recently introduced a number of customer service improvements.

AJ Bell Ready-made portfolios could be popular with DIY investors

Source: AJ Bell website

Hargreaves Lansdown’s success has been on the back of making fund investing straightforward for DIY investors.  The vast majority of private investors invest in funds rather than individual shares or bonds.

AJ Bell is also simplifying fund investing and this will help attract DIY investors to the platform.

The company is due to present at the Shares/Cenkos Forum in Islington (London) on 29 January.

AJ Bell’s business mix

As a reminder, AJ Bell runs the investment advisor platform Investcentre and the DIY investor platform Youinvest. Investcentre has more assets under management but Youinvest is growing more rapidly.

Youinvest had £8.7 billion assets under administration (AUA) at 30 September 2018 versus £29.9 billion at Investcentre.  However, customer numbers for Youinvest jumped 46% in fiscal 2018 versus a 16% increase in Investcentre customers.

AJ Bell’s DIY investor business with £8.7 billion AUA is much smaller than that of Hargreaves Lansdown at £94.1 billion (both at September 2018).  This may provide an opportunity for AJ Bell to take market share given that it charges lower platform fees than its rival (0.25% versus 0.45% on the first £250k).

AJ Bell Youinvest: much smaller than Hargreaves Lansdown

Source: AJ Bell

AJ Bell’s current DIY investor offering and the fund team

AJ Bell fund selection services for DIY investors include AJ Bell Favourite Funds, AJ Bell Ready-made (fund) portfolios and AJ Bell Passive funds.  AJ Bell Passive funds launched in 2017 and recently saw the addition of a Global Growth fund.

AJ Bell Favourite Funds is a list of 88 mainly active funds that the firm believes will continue to do well.  AJ Bell Ready-made portfolios is a collection of active funds that are designed to match an investor’s risk profile.

Three ways AJ Bell helps DIY investors invest in funds

Source: AJ Bell

AJ Bell’s fund investing team have significant experience across a number of different firms (team). AJ Bell Chief Investment Officer, Kevin Doran, joined AJ Bell in October 2017 and is profiled in an interesting Citywire interview.

Mr Doran is keen to improve industry standards with a July 2018 article calling for the Model Portfolios (MPS) reporting to “step-up” in a July 2018 article. AJ Bell’s use of big data and artificial intelligence (AI) has enabled it to reduce customer fees (Investcentre platform fees were cut from 0.25% to 0.15% in February 2018).

Kevin Doran could make AJ Bell a winner with UK DIY investors

Source: AJ Bell

AJ Bell customer updates since the IPO:

1) AJ Bell Ready-made portfolios

The introduction of AJ Bell Ready-made Portfolios in mid-December 2018 should appeal to DIY investors. Hargreaves Lansdown and Share Centre have been offering ready-made portfolios sometime and they appear to be popular.

The appeal of the ready-made portfolios is that the asset allocation work is already done for you.  If you decide you are a Cautious investor, for example, the resulting portfolio will be skewed towards lower risk fixed income (i.e. bond) funds.

The funds in the Ready-made Portfolios all come from the 88 funds currently in AJ Bell’s Favourite Funds list.  All an investor has to do is select their investing profile and a pre-set fund portfolio will be constructed.

AJ Bell’s Ready Made Portfolio service: who do you think you are?

Source: AJ Bell website

2) Customer service improvements

Turning to customer service and AJ Bell recently allowed select Youinvest customers to pay platform fees from their dealing accounts. The fees were previously taken directly from tax efficient ISA or SIPP accounts.

Customer dealing and support hours have also been extended to 7pm from 5.15pm previously. The availability of customer representatives can make a big difference to customer satisfaction.

AJ Bell forecasts and valuation (255p share price)

When shares have performed strongly it is worth reassessing the investment case. The forecast rolling P/E (next 12 months) currently stands at 32.4X versus 32X for Hargreaves Lansdown (a single unnamed broker’s forecasts are available on SharePad).

Revenue is forecast to increase 16% in the year to September 2019, 14.4% in the following year and 12.6% in the year to September 2021. This compares to historic revenue growth of 17% in 2017 and 19% growth in 2018.

Current forecasts for AJ Bell appear to be conservative given the recent pace of revenue growth. The IPO prospectus highlighted that the group was the fastest growing UK investment platform in the year to March 2018.

AJ Bell forecast (year to September)

(Source: SharePad)

The shares are currently trading at a punchy 34.5X forecast P/E multiple for the fiscal year to September 2019.  Forecast revenue growth and margin expansion reduces the forecast P/E to a more moderate 23.8X in fiscal 2021.

The group is expected to pay 5.7p dividends this year with this increasing to 8.7p in 2021. The total forecast dividend over the three-year period is 8.5% on the current (255p) share price i.e. an average of 2.8% a year.

AJ Bell forecast valuation multiples

(Source: SharePad)

Summary

I previously stated that AJ Bell “appears to be a class act.” This remains my view in light of recent customer service improvements and product innovation. A closer look at AJ Bell’s fund investment team is also reassuring.

My personal impression, from interactions with customer representatives, is that the corporate culture at AJ Bell is sound.  AJ Bell’s new Manchester office (Page 22), complete with gym and terrace bar, should help to both attract and retain staff.

It will be interesting to see how the group performed in the three months to December 2018.  The ability to take part in the IPO created an incentive to join Youinvest before mid-October.

 

At the time of publication, the author owns shares in AJ Bell.

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