Phoenix-driven Asset Shifts And Global Regulation Will Crush Margins

Key Takeaways

• Shifts to passive investing and underperformance in core strategies threaten fee income, client retention, and future revenue stability.
  
• Rising regulatory and operational costs, alongside lagging digital transformation, increase pressure on margins and competitiveness against technology-driven entrants.
  
• Robust customer growth, cost savings, and product innovation are driving higher revenues, improved profitability, asset inflows, and increased shareholder returns for Aberdeen Group.

Catalysts

Provides asset management services in the United Kingdom, Europe, North America, and Asia.

• The ongoing shift of assets from active to passive strategies, especially by key partners such as Phoenix, is likely to accelerate, resulting in a steady decline in demand for Aberdeen's traditional active management products and continued fee compression, which will directly pressure long-term revenues and margins.
  
• Heightened regulatory scrutiny and increasing compliance costs across Europe and globally are set to raise operational complexity and expenses, eroding profitability and making it harder for Aberdeen to maintain its current net margins given the group's wide international footprint.
  
• Persistent net outflows in core businesses such as Adviser, despite some improvement, signal that demographic headwinds in developed markets and aging populations will limit new asset accumulation and constrain AUM growth, hampering the group's ability to generate sustainable long-term earnings.
  
• Aberdeen's mixed track record in investment performance, particularly in actively managed equity strategies-most notably underperformance in Asian equities-risks ongoing client redemptions, weaker gross inflows, and reputational damage, undermining future revenue stability.
  
• The group's digital transformation and efficiency gains lag behind fintech-enabled peers and innovative digital platforms, making Aberdeen increasingly vulnerable to disruptive technology-driven entrants who attract younger, cost-sensitive clients, ultimately leading to lower fee income and margin contraction over the long term.

Aberdeen Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Aberdeen Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Aberdeen Group's revenue will decrease by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 24.0% today to 4.6% in 3 years time.
• The bearish analysts expect earnings to reach £58.8 million (and earnings per share of £0.03) by about August 2028, down from £319.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 55.0x on those 2028 earnings, up from 10.9x today. This future PE is greater than the current PE for the GB Capital Markets industry at 13.4x.
• Analysts expect the number of shares outstanding to grow by 0.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.68%, as per the Simply Wall St company report.

Aberdeen Group Future Earnings Per Share Growth

Risks

• Aberdeen Group is experiencing strong and sustained customer growth in its interactive investor platform, with a 9% increase in total customers and a 27% increase in high-value SIPP customers year-on-year, which has already led to a 12% rise in revenue and a 25% rise in operating profit-this trend is poised to support higher group revenues going forward.
  
• The group's successful cost transformation program has already achieved £137 million in annualized savings and is on track to deliver at least £150 million by year end, which, combined with ongoing technology investment and automation, is likely to drive further margin expansion and improve net profitability.
  
• Aberdeen's investments in product development, such as new digital advice offerings, managed ISAs and SIPPs, and active ETFs, are unlocking new growth channels and attracting new client segments, setting the stage for higher long-term revenue and diversified earnings streams.
  
• Improving net flow trends, particularly the marked reduction in Adviser net outflows and record net inflows of £4 billion in ii, along with strong gross inflows in Institutional & Retail Wealth of £21.9 billion, indicate potential for a significant turnaround in asset growth, which is critical for long-term fee-based revenue and earnings stability.
  
• The strong capital base and enhanced capital generation-including the unlocking of £35 million annual benefit from the DB pension surplus-provides Aberdeen with substantial flexibility to support and potentially increase its dividend, thereby underpinning earnings quality and shareholder returns.

Valuation

• The assumed bearish price target for Aberdeen Group is £1.4, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Aberdeen Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.4, and the most bearish reporting a price target of just £1.4.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £1.3 billion, earnings will come to £58.8 million, and it would be trading on a PE ratio of 55.0x, assuming you use a discount rate of 8.7%.
• Given the current share price of £1.94, the bearish analyst price target of £1.4 is 38.5% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.