Standard Life Aberdeen PLC (LON: SLA) – Reducing the Cost Base to Combat the Economic Turbulence

Standard Life Aberdeen PLC is an Investment Management Company, which is listed on FTSE 100 index. The Company is headquartered in Scotland and provided a broad range of assets management services in over 50 countries.

On 7^th August 2020, the Company is expected to release its half-year results for FY20.

Recent News
15^th June 2020: The Company repurchased its own 775,609 ordinary shares, for the purpose of cancellation.

4^th June 2020: The Company sold its stake in HDFC Life by selling 40,000,000 shares at INR 496.40 per share. The gross proceeds will be leveraged for general corporate purposes.

AGM 2020 Statement – AUMA declined, albeit operating at a strong balance sheet position
As on 12^th May 2020, the Company released its recent update and reported GBP 490 billion in AUMA (assets under management and administration), as at 30^th April 2020. Further, the Company revealed its estimated cash flow of GBP 24 billion for the first four months to 2020. The Company affirmed that the volatility in financial markets due to COVID-19, has been impacting the value of its business; hence, the Company is managing its costs strictly. Moreover, the Company reported a strong balance sheet position which was further expected to bolster by the disposal of a stake in HDFC Life for GBP 237 million in net cash proceeds.

Share Price Performance

Daily Chart as on 15^th June 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

Standard Life Aberdeen PLC’s shares closed trading at GBX 252.00 on 15^th June 2020, which was up 0.36% against the last day closing price. Stock's 52 weeks High is GBX 338.25 and Low is GBX 170.30.

From the technical standpoint, 3 days, 9 days, and 14 days relative strength index of the stock was favourable, and the price could rise further from the current trading level.

Valuation Methodology


Valuation Metrics
 
(Source: London Stock Exchange)

As on 29^th May 2020, the Price/Book multiple of the SLA was 0.9x, which was lower as compared with the Financial Services industry of 1.9, reflecting that the Company is trading at a lower multiple as compared to its peers.
 
Growth Catalysts and Risk Assessment
The Company is focussing on achieving profitable growth from both Wealth and Platform business. Further, it has a strong balance sheet position to withstand economic turmoil. The Group has received several awards for its funds, Gold rating for its services and 5-star rating for its portfolio management, which reflects the quality of its assets. However, the Company reported a decline in fee income last year and the management believes that tough and market uncertainties presented by the pandemic is likely to affect the business for a while.

Conclusion
During the financial year 2019, Company reported a substantial increase in total income (continuing operations), which stood at GBP 3,993 million as compared to GBP 2,131 million in FY2018. However, the fee-based income witnessed a decline with an increase in cost-to-income ratio to 71 per cent (FY18: 68 per cent). In 2020, the Group has an excellent portfolio of diversified assets and has evolved through a multi-channel approach. It is expecting moderate returns in FY 2020 despite the disruption caused by Coronavirus. In near-term, the Group is focused on financial discipline and taking several actions to prudently manage the cost base.


(Source: Annual Report, Company Website)

Based on the decent growth prospects and the valuation as done using the above method, we have given a “Hold” recommendation at the closing market price of GBX 252.00 (as on 15th June 2020)

RSA Insurance Group PLC (LON: RSA) – Prudently managing the cash flow to remain resilient.

RSA Insurance Group PLC is a General Insurance Company, which is listed on the FTSE 100 index. It serves in over 100 countries with its personal and commercial insurance products.

The Company is expected to announce its half-yearly results for FY20 on 30^th July 2020.

Recent News
1^st June 2020: The Company affirmed that estimated cost of claims has not been materially changed, as per the statement released by the Financial Conduct Authority’s business interruption court proceedings.

7^th May 2020: The Group had withdrawn its final dividend of 15.6 pence per share for FY19, in its annual general meeting.

Trading Update (Q1 FY20)
As per the trading update released on 7^th May 2020, the Company continued the momentum of strong performance in FY19 and reported decent results in Q1 FY20. The insurance market was relatively less affected by COVID-19 disruption in the first quarter. The Gross net written premium was slightly down by 1 per cent in Q1 FY20 compared to Q1 FY19. However, the operating profit of the Group witnessed a double-digit growth with an improved combined ratio. Regarding the capital and balance sheet position as at 31^st March 2020, tangible net asset value per share stood at 305 pence which was 282 pence at 31^st December 2019. The tangible shareholders' equity stood at GBP 3.15 billion at 31^st March 2020 as against GBP 2.91 billion at 31^st December 2019.

Share Price Performance

Daily Chart as on 15^th June 2020, after the market closed (Source: Refinitiv, Thomson Reuters)

RSA Insurance Group’s shares closed trading at GBX 407.70 on 15^th June 2020, which was up 0.52% against the last day closing price. Stock's 52 weeks High is GBX 736.84 and Low is GBX 321.20.

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock.

Valuation Methodology


Valuation Metrics

 (Source: London Stock Exchange)

As on 29^th May 2020, the Price/Earning, EV/EBITDA, and Price/Book multiples of the RSA were 12.1x, 6.7x and 1.1x, which were lower as compared with the Nonlife Insurance industry, reflecting that the Company is trading at a lower multiple as compared to its peers.
 
Growth Catalysts and Risk Assessment
The market condition in the insurance industry is relatively less impacted than other sectors in the financial services industry. Despite the disruption, the Company reported growth in operating profit during the first quarter of 2020. However, the Company is expecting a disruption to reflect in the second quarter of 2020 due to financial market volatility.

Conclusion
During the financial year 2019, the investment income and overall performance were broadly in range, as per the expectations. The Company expects the investment income to be lower in the current year; however, still within the range guided for the financial year 2020. To contain the impact of Covid-19 mayhem, the Group has been maintaining a strong balance sheet and suspended its dividend and will start distributing when it is prudent to do so. However, given the uncertainties, the Company is unable to provide any meaningful guidance for FY20, and it is anticipating a distorted pattern of cost of claims. Moreover, the COVID-19 effect can potentially impact its written premium income for FY20.

Based on the decent growth prospects and the valuation as done using the above method, we have given a “Hold” recommendation at the closing market price of GBX 407.70 (as on 15th June 2020)
 
*All forecasted figures and Peers information has been taken from Refinitiv, Thomson Reuters.

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