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Hargreaves Lansdown Plc Full Results Year Update – 25 September 2014

The top line picture painted by Hargreaves Lansdown’s full year results was largely positive on the surface, with further growth across all key reporting metrics. Despite this, there are signs that the pace of growth at the group is slowing, while risks to performance continue to lurk on the horizon.

Further on the downside, the group’s shares have declined following months of concern over the impact of a new cost structure, uncertainty over margins and the potential for it to lose an unspecified sum of pension AUM following the implementation of next year’s regulatory changes.

Hargreaves Lansdown Plc Share Price 8 Hour Intervals

HL SEPTEMBER
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An Overview of Financial Performance

In detail, HL saw record levels of client acquisition during the period with net client numbers up by 28% after accounting for the effects of a minor reduction in retention rates.

In addition to positive client growth, assets under administration rose by 29% to £46.9 billion during the year, while net new business also increased by a noteworthy measure (25%).

Each of the above contributed toward positive growth in both revenues and operating profits for the period, although the group’s operating profit margin declined by just over 2% and its net revenue margin for client assets fell by almost 20%.

The negative margin performance reflects revenue challenges as a result of ongoing ultra-low interest rates and changes to client money regulations that have restricted the group’s ability to earn interest on client deposits in some areas.

Despite lower margins, positive asset and revenue growth as well as a stronger cost performance helped drive a 9% uplift in full year earnings per share. This supported further increases to the interim and special dividend pay-outs which totalled 93% of post-tax profits for the period, providing a yield of 3.5% based upon today’s prices.

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The Road Ahead for Hargreaves Lansdown Plc

On a more positive note, speculation has built rapidly over recent months that the group may be on the verge of applying for a full banking licence.

The group still holds an industry-leading operating margin as well as a dominant position in its core markets. In addition, there are opportunities for expansion on the horizon at Hargreaves Lansdown, most notably in its plans to expand the array of retirement products that it offers as well as the mooted diversification into full-scale banking services.

While management have yet to commit to joining the ranks of the UK’s full-service banking providers, they have voiced an explicit desire to offer more cash management services. This follows a recent survey which assessed the appetite among clients for such services.

This survey found that most of HL’s clients prioritised better rates on cash savings deposits as opposed to a full scale banking offering.

Given that 45% of the group’s clients hold more than 75k in cash, any form of new service offering that would seek to improve the competitiveness of its cash management offering would have the potential to contribute greatly to earnings at the group level, and could support growth rates at a pace that is closer to historic levels.

While it is not yet clear exactly how management will take advantage of the opportunity presented by its cash rich clients, the likelihood is that the group will move to increase its service offering in a way that leverages this, which is positive for the earnings outlook over the longer term.

In addition to an expanded service offering, the evolving monetary policy environment in the UK and the likelihood of a resultant rise in interest rates will also be positive for margins.

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Summary

After having failed to reach our pre-existing price target of 1,480.00 pence, the shares may be down but they are not quite out. The medium to longer-term outlook offers plenty of scope for the group’s margins to improve, which, given strong growth in client numbers and AUM, will be positive for overall earnings.

In addition to this, we also continue to see the effects of pension changes next year as a likely positive driver for group performance. This reflects our belief that many who do choose to take more control of their pension pots but lack the financial resources for large investments in property, will be likely to turn toward financial markets in order to ensure their income security in future years.

Despite the positive drivers over the longer-term, the shares have sold off heavily during recent months. With negative sentiment still an issue and a valuation that remains at premium to the wider sector, the danger is that current momentum could see the shares fall further during the weeks and months ahead.

While we continue to hold a positive longer-term outlook for Hargreaves Lansdown Plc, we believe that the current downtrend could see the shares reach as low as 850.00 pence over the near term.

However, as previously stated, we believe that recent growth in both client numbers and client assets offers scope for earnings to continue to grow from their current levels. With this assumption and historical growth rates taken into account, our valuation model suggests a fair value share price of 1,098.00 pence for 2015.

Consequently, we adjust our price target to this level and shall endeavour to keep all of our members up to date with developments in the HL story as and when they occur.

 

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IMPORTANT:
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