Earnings Call: H1 2021

May 27, 2021

Hi. I'm Dani Hewson. I'm a financial analyst here at AJ Bell. I recently joined the business after spending 19 years with the BBC as a journalist and presenter, and what a time to come on board. I'll be joined today by AJ Bell Chief Executive, Andy Bell and also CFO, Michael Summersgill, who will be discussing highlights from the 2021 interim results, which were announced today. Now don't forget, if you want more detail about these results. You can find a full presentation on the Investor Relations section of the AJ Bell website. So Andy, the company delivered another strong set of results with revenue and profits both up on last year. How would you reflect on those results? Yes. It's been a strong first half of the year. We've seen revenue grew by 21%, profit before tax up 39%. That's really been driven, as usual, in our business by strong growth in customer numbers, strong growth in asset inflows And probably what's been slightly unusual really since the start of lockdown as we've seen the elevated levels of dealer Activity in our B2C customers, that's really continued. It's seen peaks, but it feels as though we're starting to find a new normal. And throughout that period, we've had our staff working from home and managed to continue to provide a high quality service to our customers. What do you think have been the key drivers of the performance? Well, obviously, really, the engine room of our business are the new customers we get in. And the net inflows both have grown Very strong, as I said before. Platform customers now at 332,000, which up 18% in the 6 months and 34% in the year. Platform assets under administration now sits at €58,000,000,000 which again are up 17% in the 6 months and 38% in the year. And really, as I said before, that the elevated dealing activity, you'll see that coming through in heightened transactional income on the DTC platform. Looking specifically at the advised platform market, what were the key developments in this period? And how has AJ Bell performed? Yes. The advisers were just well to lockdown. I think like all of us, it took a while to adjust. But then you've got used to Working on Teams and Zoom and new business carried on. And yes, our Advise platform has also seen strong Growth in both the areas we've discussed. The advised customers now sits 118,000, up 9% in the 6 months and 14% in the year. The advised assets under administration, just over €40,000,000,000 or €41,100,000,000 up 13% in the half year and 31% in the year. And really, we're seeing our customer profiles on the Advise platform broadly stable, average age of the customer 56. The average assets under administration per customer is just shy of 350,000, 347,000. We've seen the retirement investment account has done well. That's really our simplified pension proposition targeted at smaller value customers. And we also acquired a small business in Bristol called Adelpha in April. That really is a simplified mobile led adviser platform in the process of being built. We're going to rebrand it as being called Touch by AJ Bell. It's going to sit alongside Our main advice platform, and we're looking to do a soft launch in the first half of our next company year. Let's move on to the direct to consumer market now because there's been a lot of media coverage about really strong investor engagement. What are your views on the current market dynamics in the D2C market? Yes. It does feel as though investing has almost come A front page news, which in itself has helped to increase engagement of either existing customers or Actually, possibly more importantly, new customers who are coming into the market, we've seen a vaccine announcement in November. We've had 2 lockdowns in the U. K. We've seen the U. S. Election. We formally left the EU. Crypto and meme stocks has been all over the press. And all of this in a low interest environment where people are looking how best they can worth their money You for the best return. COVID has been a wake up call for people taking personal responsibility for the finances, which has played out mainly in the D2C market, but also in adviser land as well. We've seen a trend towards slightly younger customers. And You mentioned Paul, heightened deal activity. We've seen our younger customers now coming through. The average age of new customer It's 38 compared to an average age across the whole book of 43, the average AUA per customer, just shy of £80,000 These are good quality people coming into the business and I think would stand the test against any Of the DIY platforms in the market. And we've also seen this deal activity, really, you've actually You see the correlation between lockdown and dealing activity. So I think we will return to a new normal, but Everything we're seeing is that it will be new normal and dealer activity will remain at heightened levels, although maybe not at the very high We've seen during the peak of the lockdowns and the big announcements I talked about before. With that in mind, how has AJ Bell helped these new customers coming into the market? Our approach is simple. We help people to invest, and we do that by ensuring we have the easiest platform to use. And when we think about new customers, we tend to categorize them into what we call confident control, hungry for help or nervous newcomers. Our main focus is on those on the last two groups, which has really paid dividends for us certainly in the first half of the year. We talked about the new customers coming into the business being slightly over, maybe 5 or 6 years younger than the average. But still, 70 percent of these are investing in tax wrappers, which really is confirming this the point I made that they aren't coming in investing in meme stocks. On short term, they are investing long term in nature. We don't provide the complex or high risk products like crypto or CFDs or options. And we've also seen our range of in house investment solutions prove very popular, both our favorite funds, But also, we now see over 3% of the DTC assets are now held in our own range of low cost multi asset funds, which is really pleasing. So a lot of highlights there. Is there anything else that's caught your eye in the first half? Yes. I think on the investment side, it's starting to really get traction now. We've got €1,400,000,000 under management on the investment side now. That's up 75% in the last 6 months, which is exceptional growth in any market. That's We've proved popular with both advisers and DTC customers. We've recently launched the responsible growth fund and the responsible MPS or the Managed portfolio service through advisers. And really, our investment product suite is now largely complete. I think it's about distributing what we've got. And also, One of the points to make is that we announced the appointment of Helena Morrissey as Chair designate and Evelyn Burke as a non exec. Both will join us on 1st July. Just to end, what do you think is the outlook for the market and for A. J. Bell? Well, the structural growth drivers that we've talked about ever since we came to market are still learning, remain strong. I think COVID has been a wake up call, Which I think will remind people sometime that they do need to engage with their own financial futures and be that through advised or the DTC The sector, low interest rates, again, whilst there is a time of inflation on the horizon, I still think Your low interest rate environment is going to be here for a number of years to come. Our aim is to continue developing the propositions, Always challenging ourselves and making them easy to use. We'll be launching the new touch platform over the course of the next 6 to 12 months. Yes. Our culture is strong. We've got a scalable, robust platform, and we have a compelling offer for both advisors and the DTC retail investors. So It's really all about growth and increasing our market share. And so in summary, the outlook for the business remains very positive. So we're joined now by Michael Summersgill, CFO, to talk about financial performance. And Michael, with that in mind, what are the highlights for you? Yes. So the financial performance was strong across the board, but there's Two data points that show a particularly impressive aspect of our performance in H1. So the first of those is revenue. So revenue, £73,900,000 up 21%. So strong growth, but you'd expect that, to be honest, in our business. For me, the particularly pleasing nature of the growth was how high quality it was. And the second point that really highlights that fact is the PBT margin. So that was 42.8%, up 5.6 percentage points versus the prior period. So strong performance, and that supports an interim dividend of 2.46p per share. That's 40% of last year's total dividend, and that's in line with our ordinary policy. So what are the key drivers of this financial performance? High level, it's all about the continued growth of the platform business. But as ever, there's A few specific factors in H1 that really drove the performance. So the first of those factors was the dealing activity on the DTE platform. This was a big story in H1 across the industry. Retail customers have been very active for a number of reasons, partly the The continuation of the COVID-nineteen pandemic and the impact that's had on markets, partly the U. S. Election and then various other factors as well. For us, that's meant that the DTC revenue margin was up to 43 basis points. That's a 5 basis point improvement on the prior period, and that was Quite a strong period in its own right. So dealing was an all time high. That was the first factor. And then you've seen the scalability of the business Evidence in H1 as well, so focused on the cost base. Our figures show that the operational costs increased 18% in the period. But if you adjust that figure to take out the nonrecurring costs of that heightened dealing activity and you see the operational costs have increased around about 5% And compare that to the increasing customers and AUA and revenue, and you can really see the efficiency of the business model coming through in that single figure. And looking forward, what are your expectations around revenue and costs for full year 'twenty one and beyond? Yes. So probably best to split that answer into 2 parts. So focusing on the more immediate term first. So in the second half of this year and then in our next financial year. There's 2 main things that we expect to impact, and both impact our revenue. So The first is the low interest rate environment that we're now in. And the second is our expectation that, that DTC dealing activity will start to moderate. So both of those factors we've talked about in guidance previously, they're both old news really, but they start to have their full impact in the second half of this financial year and then in our next full financial year FY 'twenty two. So we'll see our DC revenue margin fall from its current levels to sort of high thirty Basis points for FY 'twenty one as a whole and then falling to around about 30 basis points in FY 'twenty two. We then look out beyond FY 'twenty two And we see those revenue margins starting to build again. There's a bigger contribution from our investment business there, and that will help revenue margins expand. And we see the same PBT margin expansion opportunities as we always have. So the operational gearing inherent in our business model means that as we continue to grow, There should still be that opportunity to increase profit margins still further, so a very positive view as we look out beyond FY 'twenty two. Thank you very much indeed, Andy and Michael, and thank you very much for joining us. Don't forget, you can find a full copy of the results presentation on the Investor Relations section of the AJ Bell website. And you can also look out for our Q3 trading update on the 22nd July. Thanks very much.