AJ Bell IPO (AJB) – Quality and growth

AJ Bell IPO (AJB) – Quality and growth

Investment platform AJ Bell is set to list on December 7 with December 5 the last day to apply for shares.  This is a quality business with recurring revenue 82% of sales and a robust 31.6% operating profit margin.  Revenue has also increased from £16.2 million in fiscal 2007 to £89.7m in fiscal 2018.

If you have an AJ Bell investment account then you can apply for shares in the group’s upcoming Initial Public Offering (IPO).

The offer price is expected to be between 154p and 166p with the final price set to be announced on December 7. We covered AJ Bell recently and separately looked at the investment case for rival Hargreaves Lansdown.

Will the AJ Bell IPO sink or swim?

Andy Bell: AJ Bell founder and CEO

Andy (James) Bell (52) graduated from Nottingham University with a first class degree in mathematics in 1987. He qualified as a Fellow of the Institute of Actuaries in 1993, which helps explain AJ Bell’s early focus on pensions. He founded AJ Bell in Manchester in 1995 and continues to run the company.

An interesting profile of Mr Bell can be found in this recent interview: the first six years of AJ Bell were apparently spent in a 149 sq foot office!  Mr Bell wrote The DIY Investor in 2013 and his biography for the book is also revealing.

(Source: AJ Bell)

Key IPO takeaways

1) Reasons for listing

The official reasons for AJ Bell listing are given as A) to enhance the profile and brand B) support the growth strategy C) widen the shareholder base and D) to assist in recruitment, retention and employee incentivisation.

The main reason appears to be that investors in the group were promised that AJ Bell would go public at some stage. The IPO will help attract new customers with it notable that Hargreaves Lansdown saw strong business momentum after its 2007 IPO.

2) IPO shareholdings: management remain invested

No new money is being raised in the IPO but existing shareholders are reducing their positions. Invesco currently has a 44.2% shareholding in AJ Bell and is reducing this to a 25.5% position.

CEO Andy Bell is selling a tenth of his current 28.3% position in the IPO to be left with a 25.5% stake. Fergus Lyons (57), a managing director at AJ Bell, is also maintaining the bulk of his current 5.7% shareholding.

Ownership pre-IPO and post-IPO

(Source: AJ Bell prospectus, P8.)

3) Dividend policy: a 65% payout ratio this year

The dividend payout target for the current fiscal year to September 2019 is to pay out 65% of post tax profit. The group has paid special dividends in the past, including in fiscal 2018, and is likely to continue doing so.

4) Recurring revenue is 82% of total revenue

Recurring revenue made up 82% of total revenue in fiscal 2018 and it also grew at a faster pace than transactional revenue. This highlights the quality of the business given that clients have to pay platform fees through thick and thin.

Recurring revenue includes both ad-valorem (a fee that is a percentage of value) and fixed monetary charges. The ad-valorem charge varies according to assets under administration (AUA).  It is therefore influenced by equity market conditions.

AJ Bell revenue growth by type

(Source: AJ Bell prospectus (P47).)

5) Growth

AJ Bell’s investment platform serves both advisors looking after clients and so-called DIY investors who invest themselves.  The latter is served by the group’s Direct 2 Consumer (D2C) division and competes with Hargreaves Lansdown and Interactive Investor.

AJ Bell has seen robust retail platform growth (whether advised or direct) with a 24% annual increase from 2012 to 2018.  Over the same period assets under administration (AUA) has increased by 26% a year.

AJ Bell retail customer growth (advised and direct)

(Source: AJ Bell)

6) Market backdrop

AJ Bell’s clients have larger average portfolio sizes than the clients of competitors in both the advisor and D2C category.  The group has also seen stronger momentum in assets under administration (AUA), which suggests that AJ Bell’s service is popular with new and existing customers.

D2C platforms: annual AUA growth to March 2018

(Source: AJ Bell prospectus, P57.)

The platform investment market has seen strong growth in recent years and this is set to continue. Platform drivers include pension freedom reforms, the shift towards defined contribution pensions and the need to save more.

UK platforms total AUA and customer numbers

(Source: AJ Bell prospectus, P38.)

AJ Bell’s valuation

The AJ Bell IPO share price range translates into a valuation range of £626 million to £675 million (mid-point £650.5 million).  In the financial year to September 2018 the group generated a post tax profit of £22.6 million.

This puts the historic P/E ratio at just under 29X using the mid-range valuation – 27.7X at the lower-end and 30X at the higher-end. Net profit for AJ Bell increased 29.6% in fiscal 2018 and a crude forecast is to assume the same pace of growth this year.

This would translate into a 22.4X forecast P/E ratio for fiscal 2019 at the mid-point IPO price.  The group had a healthy cash position of £49.7 million at the end of September 2018.

AJ Bell pre-tax profits: the profit margin has been increasing

(Source: AJ Bell)

AJ Bell versus Hargreaves Lansdown

Hargreaves Lansdown (HL.) trades on 38.6X historic earnings for the year to June 2018. The forecast P/E rating for Hargreaves Lansdown in the fiscal year to June 2019 is 33.8X.

Hargreaves Lansdown merits a premium rating given that it is the market leader with eye-watering profit margins. However, AJ Bell is growing more quickly than its larger rival and its operating profit margin is on an improving trend.

Valuation and operating metrics

Sources: AJ Bell and Hargreaves Lansdown, *Assuming the same net profit growth as 2018.

Summary

AJ Bell appears to be a class act.  The group appears to be closing the gap with Hargreaves Lansdown in terms of the quality of its retail platform.  My impression, as an AJ Bell customer, is that the company strives to put the customer first.

AJ Bell has a lower platform fee on the D2C side than Hargreaves Lansdown (0.25% versus 0.45% for the first 250k) and recently introduced a range of passive funds.  Both factors will help AJ Bell to hold its own in the face of the up-start robo-advisors.

If you have any feedback as an AJ Bell client or have any views on the upcoming IPO please leave your comments below.

 

At the time of publication, the author is a client of AJ Bell and may apply for shares in the upcoming IPO.

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  • comment-avatar

    Great article thanks. Good breakdown of numbers and logic, which confers with my initial thoughts. I shall be putting in for some in my (AJ Bell) Sipp on the basis of the discount and potential growth. Regards

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  • comment-avatar

    Thanks hawkipa – Feel free to share any thoughts on how you find AJ Bell as a client. They seem ok to me. Probably not as slick as Hargreaves Lansdown but I think they are ok. There have been some complaints about the late payment of dividends. Generally, though, I think AJ Bell do a good job.

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    AJ Bell further valuation thoughts:

    It is probably worth saying that AJ Bell also run a less profitable advisor focused business (AJ Bell Invest Smart). So they can’t be directly compared with Hargreaves Lansdown. Hargreaves Lansdown only service D2C or DIY clients i.e. the consumer directly.

    The advisor market for platforms is more competitive than the consumer market for platforms. Hargreaves Lansdown generates mixed reactions from people – including myself! But they know the DNA of the DIY investor very well.

    What I give AJ Bell credit for is 1) having a lower platform fee than Hargreaves Lansdown on the consumer side i.e. AJ Bell Youinvest. 2) Offering passive funds to new investors. Hargreaves Lansdown appears to push its users onto the more expensive Unit Trust structure.

    Whether AJ Bell should be valued at a discount to Hargreaves Lansdown is up for debate. On the one hand AJ Bell generates lower margins and has a weaker market position on the consumer side than Hargreaves Lansdown. In my view, Hargreaves Lansdown is a truly customer focused organisation that has a very slick offering. Just give HL a call. They pick up the phone quickly and are excellent.

    On the other hand AJ Bell is growing more quickly and its margins are improving. The lower platform fee of AJ Bell also means that it may be able to attract clients from Hargreaves Lansdown. An additional point is that AJ Bell can be considered to be more diversified than Hargreaves Lansdown given that it also provides a platform for advisors.

    Previous valuation of AJ Bell

    It is also notable that you can research how AJ Bell was valued by the investment funds that held it up until now. In 2007 it was valued at only £78 million apparently. When Woodford sold is 8% stake in March 2018 for £40m this gave AJ Bell a £500m valuation. However, Woodford probably had to offload at a distressed valuation due to redemptions in his funds.

    You can follow the historical valuation of AJ Bell by looking at the valuation that Invesco gave to it. Citywire does a good job of following this fairly closely (just search on Citywire for AJ Bell articles):

    https://citywire.co.uk/funds-insider/news/aj-bell-plans-stock-market-float-as-woodford-sells/a1100245?section=funds-insider

    Valuation aside:

    All the newspapers I read said that AJ Bell was hoping for a £500m valuation at the IPO. This appeared to only be based on the valuation that Woodford exited in March! Just goes to show: don’t believe everything you read in the newspapers! When the IPO valuation of AJ Bell came out a lot of the press said “This was higher than the £500m expected.” A slightly misleading headline! They obviously plucked the £500m valuation from Woodford’s exit point earlier this year. There was no expectation it would list at £500m as far as I know.

    An additional thing I found is that some newspapers just said the company is trading on XYZ P/E for the current year according to forecasts. They gave zero details of these forecasts and given that it is an IPO there are likely to be no forecasts! The newspapers probably just did what I did and extrapolated from last year’s earnings growth rate. Fair enough but they should at least be honest about it!

    Lastly in case of interest the company is covered by This Is Money:

    https://www.thisismoney.co.uk/money/investing/article-6449889/MIDAS-SHARE-TIPS-firm-helps-investors-buy-shares-winning-investment-itself.html

  • comment-avatar

    I am a bit nervous about the AJ Bell valuation in these markets.  You have to take account of their asset mix, mainly equities and their  forward PE in falling markets. I have not done the numbers yet.  The timing of the listing isn’t great.

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    • comment-avatar

      Yes interesting to see that Hargreaves Lansdown sold off after their IPO due to the financial crisis. So AJ Bell could well do the same. Hard to know. I think IPOs in difficult markets are best. This means the valuation should be attractive. Also that only the quality IPOs are listed. But as you say the P/E ratio isn’t a steal on face value. Declining markets could hit AJ Bell’s momentum in the current year.

  • comment-avatar

    I’m also a bit sanguine about this IPO.  I’m an AJBell customer and have Family SIPPs and ISAs in there, mainly for direct share investments as opposed to fund investments.

    I’ve found their ability to execute on certain small cap stocks to be a problem – sometimes you can’t get a price to trade on-line even when I can see on Level2 that there is a market being made. You then have to call the dealing desk, which is a higher price per trade.  You get the impression that their platform is geared towards the more popular stocks.

    Overall though their dealing prices are low, custody charges are low and customer service is good. I’ll probably apply for some today but expect to see the shares fall a little once they start trading in these markets.

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    • comment-avatar

      This is roughly my impression too. AJ Bell just aren’t as slick as Hargreaves Lansdown or some other platforms. But I think they will get there over time. AJ Bell didn’t have an option to reinvest dividends from stocks until not so long ago for example. Also all the fees come out of the individual accounts (ISAs etc) rather than a separate account. Fundamentally, though, it appears to be a good business.

      There have been some comments about the late payment of dividends recently. So I think AJ Bell need to improve. But I am sure they will do so over time.

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