Standard Life Aberdeen PLC (LON:SLA) is expected to see a continued deterioration in fund flows but this will be offset by cost savings resulting from the newly merged company, according to UBS.
UBS upgraded the stock to a ‘neutral’ rating from ‘sell’ and lifted the target price to 415p from 355p.
Standard Life and Aberdeen completed their £11bn merger in August to create the UK’s largest fund manager and the second largest in Europe. The combined group has said it expects to generate cost savings of £200mln a year.
UBS said while fund flows remain a “key challenge” for Standard Life Aberdeen that will drag on earnings, cost synergies of the merger should support growth.
The bank expects net outflows of £40bn for fiscal year 2017 and £37bn for 2018. But it predicts an earnings compound annual growth rate of 6% through to fiscal year 2020 if it achieves cost synergies of £230mln per year and revenue attrition no higher than 4%.
“Combined with dividends growing at a similar level, 5.4% yield (fiscal year 2018) underpinned by a low risk balance sheet, we upgrade to neutral,” UBS said.
The bank added: “We view the merger of Standard Life and Aberdeen as attractive strategically and financially.“
On reports of a potential sale of the UK annuity portfolio, which has about £14.9bn of assets, UBS said it makes strategic sense in line with a capital light strategy but financially “looks unattractive”, given current low interest rates.
“We do not expect a disposal of the c. £15bn UK annuity portfolio in the short-term and believe financials would be negative due to 1) tight pricing, 2) limited potential capital release and 3) the lost contribution (>30%) it makes to operating earnings for the UK pensions and savings business, which is under-appreciated.”