AJ Bell reports 50% surge in profits

Share platform provider AJ Bell (AJB) seems to have perfected the art of passive income after a 50 per cent surge in profits, matched by a 46 per cent dividend hike, left the strong impression that higher interest rates are a very good thing indeed for companies that hold vast amounts of (other people’s) money. 

The company also managed organic increases in both client numbers and assets. These were up by 12 and 10 per cent, respectively, with total clients now at 491,000 and assets under administration (AuA) of £76.1bn. The rise in assets was partly helped by £1.5bn of favourable market movements, reversing £4.3bn of adverse effects last year. Meanwhile, total net inflows were £4.1bn.    

The reason for the income surge was clear from the revenue breakdown. Ad valorem fees, which generally recur  with administrative and interest fees, as opposed to transaction fees that depend on client trading volumes, rose by an impressive 60 per cent to £161mn – which was by far the largest component of the company’s £218mn of annual turnover. The impact has been so noticeable that AJ Bell now has revenue as a percentage of AuA of 29.8 basis points – the highest level in years – with operating profit margin coming in at 40 per cent.

Interestingly, AJ Bell published the total level of client cash it holds on account: 13.3 per cent, or £3bn, of the direct-to-consumer (D2C) business was cash on hand, while the business-to-business segment was just 3.6 per cent or £1.7bn. Numis analysts reckon the cash figure is skewed towards D2C because of the prevalence of self-invested personal pensions (Sipps) in that segment. Customers about to draw down a Sipp tend to keep more assets in cash. Numis’s view is that this means AJ Bell can continue earning significant ad valorem fees, with interest rate sensitivity for revenues in 2024 rated to be very low, even if interest rates hit 1 per cent. This week's FCA crackdown on the fees platforms earn from client cash should be seen in this context, particularly as AJ Bell said its FY2024 guidance had already factored in the price changes it subsequently announced on 12 December.

The broker currently values the shares at a price/earnings ratio of 15 for 2024, a significant premium to Hargreaves Lansdown (HL.) which has struggled to register the same operational performance. AJ Bell has room to expand, probably at the expense of its much larger rival. Speculative buy.

Last IC view: Hold, 315p, 25 May 2023