AJ Bell share price falling as FCA warns on client cash interest

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The AJ Bell share price has taken a battering today as the FCA announced plans to curb the way investment platforms can profit from client cash interest.

This is in contrast to yesterday when AJ Bell (LON: AJB) shares were up by +14.20% over the last month. The direct-to-consumer or D2C investment market is growing, but so are the number of competitors, all of whom are keen to grab market share. So, is it worth investing in AJ Bell, as well as investing with AJ Bell?

AJ Bell share price jumps (LON-AJB)

Free investing apps increasing competition in the sector

The direct-to-consumer investment market is growing, and AJ Bell is the UK’s number two provider.

The company and the sector benefitted from covid lockdowns as people had time on their hands and many of them used that free time to get more involved with the management of their investments and savings.

AJ Bell’s final results for the year ending in September 2023, were very positive and showed revenues that were up +33.0% to £218.20 million and pre-tax profits that had risen by +50.0% to £87.70 million, up from 2022s £58.40 million.

Margins increased by almost +0.30% and earnings per share at the company jumped by +46.0% to 16.53p, up from 11.35p in 2022.

AJ Bell has added almost 51,000 new customers this year, alongside £4.20 billion of new assets under administration. Although that figure was – £1.60 billion below the 2022 comparative.

Long term price decline

Trying to time to time an investment is never easy AJ Bell shares are down by just over -14.0% in the last year and by -17.64.% in the last two years.

However, over the short term, the stock price has picked up, rallying by +23.37% in the last five days for example.

Following the release of the full-year results, the good news is now out in the open and the stock has just started to drift lower.

Weakness in the share price might provide an entry point for investors if, for example, the stock trades back to old support/resistance found between 280p & 288p.

Is now a good time to buy AJ Bell shares (LON: AJB)?

However, I think there are a few questions to ask before considering a purchase.

  • Will AJ Bell’s customer numbers continue to grow?
  • Will the firm be able to maintain its improved profit margins in a highly competitive marketplace?

Increased interest in investing pushed new accounts higher

The stock has enjoyed a good run in the last weeks of 2023 but the share price remains well below the all-time high of 487p posted in January 2021.

As we have already noted the company is growing both the top and bottom lines, attracting new cash and new customers and earning more from them.

The shares currently trade on a PE ratio of 18.7 times earnings, still not that cheap, however, that number is forecast to fall to 15.40 times earnings in 2026 according to broker Shore Capital.

During that time profits before tax at AJ Bell are expected to grow to £111.0 million up from this year’s £87.7 million.

The stock is priced for growth within a marketplace that’s estimated to be worth a total of £3.0 trillion. Unlike many growth stocks, AJ Bell does pay a dividend and has a yield of 2.40%.

A dividend yield that could expand to 4.20% in 2026. During that time, earnings per share at the firm are expected to grow to just over 20.0p, from the current 16.53p.

Improving margins and profitability

AJ Bell’s final results were better than many investors had expected and they showed that the firm was still attracting new customers and assets. whilst improving its margins and profitability.

At a headline level, the firm’s earnings came in as much as +8.0% above city forecasts and that has helped to drive the share price higher. In turn may well have triggered some short-covering.

However, the jump in revenue and earnings is largely down to much-improved levels of net interest income or NII. Which is the difference between what AJ Bell receives in interest on its client’s cash and what it pays to them.

If interest rates are peaking in the UK, then that source of additional earnings could come under pressure.

Forecast & predictions

The analyst’s consensus for the AJ Bell share price is currently 400p and the average recommendation is a moderate buy. However brokers Shore Capital believe that the share price has run ahead of itself for now.

Yet the broker still sees AJ Bell’s valuation as attractive over the longer term.

That said it may be better to wait until the AJ Bell’s first-quarter trading update, to get a handle on current trading, which is scheduled for the 19th of January.

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