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Aberdeen Asset Management plc – Is It A Buy At This Level?

Asset management firms don’t stand a chance of offering meaningful upside these days. Fully valued stocks and bonds render their task particularly tough. Aberdeen Asset Management (LSE: ADN) is no exception — unless a suitor bids for it or management considers a large stock buyback.  

A Takeover Target & Valuation

When asked about the likelihood of such a takeover, a senior source in the City of London told your columnist: “Aberdeen looks a bit expensive so the answer to your question is probably ‘yes’!” No kidding: this M&A binge spurred by loose credit could soon impact the financial sector, too.

Then, Aberdeen would come under the spotlight, particularly if its valuation becomes more attractive. Once a predator with ambitious expansion plans in the US, Aberdeen could become a prey.

Its stock was hammered in early trading on Tuesday in the wake of poor 1H/2014 results but still managed to close at £4.35, which valued the firm’s equity at £5.5billion. It underperformed the market on Wednesday – and more weakness should be expected.

Aberdeen’s stock chart presents a double top and it must not break the £3.9 support line or it could be tough times ahead for shareholders. From May 2009, the stock has recorded a compound annual growth rate of 27.3%, but in the last 12 months it has traded in the £3.57-£4.92 range.

Based on trading multiples, it’s valued broadly in line with competitors.

Consolidation For AUM Firms

While large bank deals remain thin on the ground, and would likely be prevented by regulatory hurdles and banks’ capital constrains, the asset management industry would certainly benefit from a round of consolidation. For that to happen, sellers need to adjust their price expectations.

Synergies are hard to come by, for many asset management firms have had their fair share of restructurings in recent years. Aberdeen itself is rejigging its portfolio following the £650 million purchase of Scottish Widows Investment Partnership (SWIP) from Lloyds Banking Group.

Aberdeen Asset ManagementThe acquisition of SWIP, analysts at Royal Bank of Canada recently argued, will give Aberdeen the diversification it needs. The firm will gain exposure to equities in the UK and Europe, sterling fixed-income securities, greater scale in property as well as access to retail investors and reduced exposure to emerging markets. This would be great news if most of the aforementioned asset classes were not trading around all-time highs – precisely where they stand right now. 

The broker says that investors ought to hold long positions, although stock buybacks will ensue in 2015 at the earliest.

The problem with this upbeat view is that it seems to bank on the possibility that Aberdeen’s business has eventually bottomed out after difficult months where redemptions by clients had a big impact on both the operations and the valuation of the stock. That’s not a given, however.

Aberdeen’s net outflows of £200 million in March bucked the trend but were still significant and were preceded by outflows totalling about £4 billion in the first two month of 2014.

Aberdeen hasn’t turned the corner yet and the integration of SWIP will take a couple of years to complete. While it remains a decent dividend play, its risk profile would justify an investment only under the conviction that an offer will emerge or buybacks will be promptly launched.

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Alessandro does not own shares in any of the companies mentioned.