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).)
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.
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.