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Citi: Gars outflows should not be the focus

Gars outflows shouldn't worry investors, according to a research note from Citigroup.

Citi: Gars outflows should not be the focus

Outflows from Standard Life Aberdeen's (SLA) Global Absolute Return Strategies (Gars) fund should not worry investors, according to Citigroup.

In a research note, Citi analysts said the firm is ‘undervalued’ and reiterated a buy rating on the stock, highlighting its share buybacks, platform earnings and Indian business as reasons to be positive.

It added that SLA’s 2019 price/earnings ratio (P/E) of 10.9x ‘ignores the ongoing return of value to shareholders’ in share buybacks and stake sales and cost synergies from the Aberdeen Asset Management merger, which is projected to hit £250 million by August 2020.

The firm initiated the first tranche of its planned £1.75 billion share buyback programme in August, having decided to return the money to shareholders following the £3.2 billion sale of its insurance business to Phoenix.

Citi also flagged the higher P/E of SLA’s listed Indian investment stakes, HDFC Life and HDFC Asset Management, as reasons for its buy rating and set a price target of 385p.

It comes after Royal Bank of Canada forecasted that net outflows from Gars will hit £12 billion in 2018 and downgraded its price target from 380p to 350p.

The Citi analysts said: ‘Valuation is compelling, catalysts for re-rating have begun. Impact of cost synergies on future earnings per share (EPS) growth is undervalued.

‘In volatile market conditions, ‘self-help’ growth from cost synergies provide useful earnings support. We forecast 34% EPS growth 2019E, 24% 2020E.

‘Focus on Gars and Active Equities (EM, APAC) outflows disregards positive gross flows into the platforms business, and other multi-asset fund strategies (e.g., MyFolio, Parmenion).’

SLA’s asset management arm Aberdeen Standard Investment has struggled in the first half of this year, with outflows from Gars contributing to a net outflow of £19.2 billion across the fund business in the first six months of this year.

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