Standard Life Aberdeen Plc

Standard Life Aberdeen Plc (LON: SLA) is an Investment Management Company, which is listed on FTSE 100 index. The Company is headquartered in Scotland and provides a broad range of assets management services in over 50 countries.

Investment Highlights - Standard Life Aberdeen Plc – Buy at GBX 225.20

• Acquisition of SL Asia completed on 30 June 2020, which creates a stronger insurance business with licences to serve Hong Kong and Mainland China.
• As per valuation metrics, EV/Sales, Price/Earnings, Price/Cash Flow and Price/Book Value multiple of the Standard Life Aberdeen Plc is currently lower as compared to the corresponding multiples of the Investment Banking & Investment Services industry. It reflects, shares are undervalued as compared to the industry.
• In the last six months, the Company delivered a decent return of ~ 4.84% and delivered higher returns compared to the benchmark Index (FTSE-100 Index).
• From the technical standpoint, 14-day RSI is currently supporting an upside move (around 43 level), which means the stock price could increase in the short term.

Key Risks

• The ongoing market volatility arising from geopolitical and economic uncertainties can dampen investor sentiments.
• The Covid-19 pandemic and wider economic downturn have been impacting the portfolio value of assets.

Financial Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the Company has shown a robust investment performance with assets under management and administration (AUMA) of £511.8 billion with 68% of the assets outperformed the index over three years.
• The Company reported improved gross inflow of £38.2 billion in H1 FY2020 with a net inflow of £0.1 billion excluding Lloyds banking group (LBG) withdrawal.
• SLA declared the interim dividend of 7.3 pence per share that would be paid in September 2020 and is focused on completing share buyback of £400 million in H2 FY2020.
• As of 30 June 2020, the Company has a strong capital position and balance sheet, with a liquidity of £2.8 billion and a regulatory capital surplus of £1.8 billion.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. Both the top-line and the bottom-line performance declined, while profitability remained in the negative zone. The transformation programme stays on track, and it is projected to deliver cost synergies of £350 million by the end of 2020 and £50 million in 2021. Further, market recovery would support the Company's position as an active asset manager. Overall, SLA is confident about the liquidity position to pay the dividend and complete the share buyback. The stock made a 52-week low and high of GBX 170.30 and GBX 338.25, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Standard Life Aberdeen Plc at the current price of GBX 225.20 (as on 3 November 2020, before the market close at 8:10 AM GMT), with lower double-digit upside potential based on 0.98x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Direct Line Insurance Group Plc

Direct Line Insurance Group Plc (LON: DLG) is a General Insurance Company, which operates through four segments – Motor, and other personal lines and Commercial.

The Company expects to release Q3 FY2020 results on 10 November 2020.

Investment Highlights - Direct Line Insurance Group Plc – Buy at GBX 265.60

• The Company is on track to deliver at least a 15% return on tangible equity (ROTE) over the long-term, and operating profit of 93% to 95% in FY2020.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Earnings, Price/Cash Flow and Price/Book Value multiple of the Direct Line Insurance Group Plc is currently lower as compared to the corresponding multiples of the insurance industry. It reflects, shares are undervalued as compared to the industry.
• Over the course of 4 years (FY15 – FY19), the Company’s pre-tax profit surged from GBP 347.00 million in FY2015 to GBP 401.10 million in FY2019. Compounded annual growth rate (CAGR) stood at ~ 3.69%.
• From the technical standpoint, 14-day RSI is in oversold zone and supporting an upside move (around 35 level), which means the stock price could increase in the short term.

Key Risks

• To meet the new regulations, it needs to implement new processes, failing to do so would increase the compliance risk.
• Acquisitions to match rapid transformation integration risks and expected synergies may not be achieved.

Financial and Operational Highlights – H1 FY2020 (30 June 2020) (released 4 August 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, the gross written premium increased by 0.4%, reflecting strong premium growth in Q1 FY2020 offset by coronavirus related disruption in Q2 FY2020.
• Direct own brand in-force policies increased by 2.0% year-on-year in H1 FY2020, with continued growth across Green Flag, Motor and Commercial direct own brands.
• The Group witnessed a strong capital position with a solvency capital ratio of 192% after dividends.
• The Board proposed an interim dividend per share (increased by 2.8% year-on-year) of 7.4 pence.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

The Company has shown resilient business performance in the first half of the financial year 2020, despite the covid-19 related disruption. The Company has reiterated its target for a combined operating ratio of 93% to 95% in FY2020 and anticipate restructuring cost of £60 million to maximise the opportunity for operational efficiencies. Further, it has reiterated its expense ratio target of 20% by 2023. However, DLG may not be able to achieve the planned cost savings of £50 million, due to Covid-19 disruption. In FY2020, the Company expects a net investment yield of nearly 1.8%, with at least a 15% return on tangible equity per annum over the long term. The stock made a 52-week low and high of GBX 215.83 and GBX 339.92, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Direct Line Insurance Group Plc at the current price of GBX 265.60 (as on 3 November 2020, before the market close at 9:25 AM GMT), with lower double-digit upside potential based on 1.56x Price/NTM Book Value (approx.) on FY20E book value per share (approx.). 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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