AJ Bell can bank the benefits of scale, without the challenges that come with the incumbent status of Hargreaves Lansdown, its prime rival. Even in the aftermath of the disastrous mini-budget last year, AJ Bell’s flows stayed positive at £2 billion over the six months to the end of March. Together with healthy market movements of £2.6 billion, that pushed total assets under administration up 7 per cent to £73.8 billion, or £68.6 billion excluding the non-platform business.
True, that organic growth rate of almost 3 per cent is weaker than its history, a consequence of shakier investor confidence and rising pressures surrounding the cost of living that have depleted household savings. But it is markedly brighter than the heavy outflows suffered by traditional UK funds, as Numis, the broker, notes.
It is also better than the 2 per cent organic growth of Hargreaves Lansdown over the same six months. Look back over a longer time and the gap is wider. Since 2019, AJ Bell has increased assets on its platform organically by an annual 12.5 per cent. For Hargreaves, that rate is almost half at 6.8 per cent.
Analysts at Shore Capital forecast organic growth of 7.1 per cent for AJ Bell this year, almost double the 4 per cent the broker thinks Hargreaves will turn out, or 0.9 per cent excluding its lower-margin active savings product.
The difference in pace is a natural function of Hargreaves’ thumping market share, which stands at about 42 per cent. Pushing that forward in the face of cheaper upstarts and more established players such as Interactive Investor and AJ Bell is a struggle. For the smaller wealth management group, that share stands at 6.7 per cent of the direct-to-consumer market, up from 6.2 per cent last year and 1.3 per cent a decade ago.
Advertisement
Better growth potential is reflected in AJ Bell’s superior forward price-to-earnings ratio, which stands at 20, versus 12 for Hargreaves. Shares across the sector have derated as attracting new cash to investment platforms becomes tougher after the lockdown trading boom; for the former, the sell-off has left its shares more cheaply valued than they have been since going public in 2018.
The pace at which platforms can gather new funds will become even more important once the rapid rise in interest rates starts to fall away. A 61 per cent rise in pre-tax profit over the first half of the year was largely driven by a higher base rate, which fattened AJ Bell’s overall revenue margin to 29 basis points, up from 20.3 points a year earlier. The platform provider was paying clients 2.65 per cent for funds held in their Sipps and 1.65 per cent on Isas over £10,000 — an easy payday.
The margin is expected to remain flat at the end of its financial year in September, as investors have started to spend more of the cash stored on the platform while markets were most volatile. Next year the revenue margin is expected to compress.
Hargreaves’ heavy capital expenditure plans over the next three years are a second-order impact of its market dominance, set to erode profits. True, technology, distribution and staff costs are set to increase by about a total of a fifth this year for AJ Bell, which absorbs inflation but also the expense of pushing the brand harder. But some of that should fall away. Even without the same bump from rapidly rising interest rates, analysts think pre-tax profits could grow at an annual rate of just over 15 per cent in the two years from September.
As a capital-light business and with no plans for a spending spree, there is the chance more cash could be returned to shareholders. But it is the platform’s potential to take more share and boost earnings that are making the stock more appealing.
ADVICE Buy
WHY Shares look attractive valued in light of the long-term growth potential
Pets at Home
Advertisement
Growth won’t come as easily as it once did for Pets at Home. Investors already recognised as much, pricing the shares at 17 times forward earnings, about half the peak reached during the pandemic.
The surge in pet ownership as people switched to home working had set a high bar for sales growth. Pushing forward revenue at a sustainably faster rate than pre-Covid has brought with it a step up in capital expenditure at a time when inflation and foreign exchange market fluctuations have incxreased operating costs. That stifled profit growth last year to just under 5 per cent, even after stripping out costs associated with its new distribution centre.
This year underlying profit is expected to be flat as the company absorbs higher costs together with a £60 million investment bill under a five-year plan. Last year was the peak in terms of spending, which will total £400 million.
The bulk is going towards opening and overhauling more of its shops and improving its website and data analytics, used to determine everything from where to open the next store to targeted marketing. The rest, about a fifth of total investment, will be in expanding the vets business, which by virtue of its smaller scale should lift sales at a faster rate than retail operations. It is the higher-margin vet practices that Lyssa McGowan, chief executive, thinks can help to raise the group’s organic sales growth to 7 per cent a year, ahead of the 4 per cent turned out by the pet care market, alongside a 10 per cent rise in pre-tax profit once the additional costs fall away.
Investors shouldn’t take fright at the prospect of subdued profits in the near term. Investment will be funded by cash generated by the business, of which there is plenty. Free cash rose to £93 million last year, which analysts think will be at a similar level this year. A net cash pile of £54.7 million was enough to declare another £50 million share buyback.
Advertisement
The group has taken its market share to 24 per cent, six percentage points higher than five years ago, while its return on invested capital has been consistently above 20 per cent. That should encourage investors that it is spending wisely.
ADVICE Buy
WHY Investment now could produce greater profit growth over the long term
