Would I participate in the AJ Bell IPO?

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Investment platform AJ Bell has confirmed its plans to float on the London Stock Exchange in December.

Investors with longer memories may remember when the firm’s larger rival, Hargreaves Lansdown, floated in 2007. Since then, Hargreaves’ share price has risen by 780% to 1,854p, and the group has joined the FTSE 100. By any standards, Hargreaves has been a stunningly good investment.

At first glance, AJ Bell appears to share some of the winning characteristics that have made its larger rival so successful. It’s popular with customers and is growing fast, according to recent figures.

Today, I want to take a closer look at AJ Bell. Should private investors aim to buy shares in this up-and-coming company?

Strong growth

Earlier this month, AJ Bell published details of its financial results for the year ending 30 September. The firm’s revenue rose by 19% to £89.7m last year, while pre-tax profit climbed 31% to £28.4m.

Customer numbers were up by 30% to 183,213, while assets under administration rose by 25% to £38.6bn.

These numbers compare quite well with those from larger rival Hargreaves Lansdown, where pre-tax profit rose by 10% last year and assets under administration rose by 16% to £91.6bn.

AJ Bell says its customers are loyal, with a retention rate of 95%. These figures suggest to me that the firm’s customers are also quite affluent, with an average portfolio size of £210k at the end of September. That’s more than twice the average portfolio size of £84k reported by Hargreaves Lansdown at the end of June.

I’m not sure how significant this is, but I’d guess that having wealthier customers could be an advantage. I’d expect larger portfolios to generate higher fees, without requiring too much extra administration.

How profitable is AJ Bell?

AJ Bell’s 2018 results show that the group generated an operating profit margin of 31.5%, and a return on capital employed of 42.9%.

These are impressive numbers and suggest to me that this is a high quality business. Having said that, I think it’s worth pointing out that the equivalent figures for Hargreaves Lansdown were even higher, at 65% and 71.7%.

Can you buy shares?

With no debt and plenty of net cash, AJ Bell won’t be raising any new money when it floats. The IPO shares will be provided by existing shareholders who want to sell some of their holdings.

Shares will only be offered to institutional investors such as fund managers. The only private investors who will be able to apply to take part in the IPO are AJ Bell customers who held accounts prior to 15 October. Other investors will have to wait until the shares start trading publicly to buy.

Would I buy?

AJ Bell looks like a high quality business to me. It’s the kind of share I’d like to own. But it’s worth remembering that the stock market has been rising steadily for 10 years, boosting assets under management. Regulatory changes have also helped to speed up customer growth.

I don’t buy shares in new flotations because they’re often timed to favour the sellers, who generally know much more about the business than the buyers. In this case, I think there’s a risk that a stock market crash, or a long period of flat performance, could slow AJ Bell’s growth over the coming years.

I plan to wait until the company has traded publicly for a while before deciding whether to invest.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.