Hargreaves Lansdown Plc Interim Update – 26 February 2015
Hargreaves Lansdown (HL) is one of the UK’s leading financial services businesses. The company provides a multitude of investment-related services including share dealing, discretionary wealth management, ISA administration, pension administration and custodianship services.
HL is best known for its Vantage brand which enables investors to house a portfolio containing multiple asset classes within the one platform. The group is often perceived as offering a premium brand among the retail investor community, and while not the cheapest, it has distinguished itself from competitors over the years through placing a significant emphasis on the customer experience.
The group earns income through a percentage charge on assets under management as well as commission charges on individual transactions. The biggest contributor to earnings is the annual management fee levied against the market value of assets under management.
|Index||FTSE 100||Ticker||HRGV.L||Latest Close||1,180.00|
|52 Week High||1,498.00||52 Week Low||827.00||P/E (F)||31.7|
|Dividend Yield %||2.7||Dividend Cover||1.1||CEO:||Ian Gorham|
|CFO:||Simon Cleveland||Previous Price Target||850.00 /
|Current Price Target||1,200.00 / 1,098.00|
Hargreaves Lansdown shares appear to be staging a recovery; both price targets hit
When we last updated our outlook for Hargreaves Lansdown we assigned what was effectively two price targets to the shares.
This was because over the near term we saw souring sentiment toward the group as likely to drive a deeper correction in the shares, to multi year lows of 850.00 pence, while over the medium term we actually held quite an optimistic outlook for the group.
Our short term concerns were mostly the result of building scepticism over the group’s ability to maintain margins in the post-RDR market, a customer rebellion over the group’s new fee structure, an uncertain outlook for UK and European equities and further question marks over the likely impact of pension changes in April this year.
However, we also stated that with these risks set aside, there remained a case for sticking with Hargreaves Lansdown over the medium term as the outlook for future earnings was still a favourable one. For this reason we assigned what we believed to be a fair value target price of 1,098.00 pence to the shares for the 2015 period.
Since this time HL shares have reached both of the above referenced targets, with 850.00 pence being struck in November and the 1,098.00 pence level being breached in February 2015.
Below we explain why we still believe that the group will be able to maintain earnings close to current levels in 2015, and why we believe that we could actually see the shares trading some distance above our target price for much of the year.
Hargreaves Lansdown Plc Share Price / Daily Intervals
The road ahead for Hargreaves Lansdown Plc
While the road ahead is unlikely to be without pitfalls for HL we believe that, in light of recent developments, there are now a range of factors that could support sentiment toward the group in 2015. Most notably the recent record high on the FTSE, if sustained, should be a positive driver of investor activity and commission income during the year ahead.
Although there are risks to our positive outlook for financial markets in 2015, we believe that both equity and bond markets could draw encouragement from what is still a loose global monetary policy environment, despite the fact that the UK and US are likely to hike rates later on this year.
In support of this belief we note that in many countries across the continent sovereign bond yields and credit spreads remain at record lows, while the ECB, the BOJ and the People’s Bank of China are all expected to remain upon the path of easier policy throughout the period.
This is likely to prompt a continuation of the “reaching for yield” which has been observed in developed markets during recent years, which could both support equity markets as well as take the sting out of the tail of any eventual interest rate hikes in the UK and US.
Such events will be positive for the level of assets under administration at HL, custody charges, trading commissions and consequently, earnings come the end of the period.
In addition to macroeconomic drivers Hargreaves Lansdown is scheduled to launch a new retirement planner service in April, to coincide with UK pension changes, which is designed to leverage the group’s leading position as an annuities supermarket and provider of drawdown services in the UK.
The move by management comes in response to 143,000 client requests for information relating to the various options and retirement services that will be available from the beginning of April. Further from here, the recent interim update also saw HL confirm its intention to enter the cash management (savings) arena over the next 18 months.
Both of the above offerings should be helpful to Hargreaves Lansdown as the income generated from them may go some way toward offsetting the impact of slower growth in mature product ranges such as stockbroking and fund management.
Balance sheet, dividend and valuation update
In relation to finances, Hargreaves Lansdown continues to maintain a robust balance sheet, with a current ratio of 1.7X. We feel that this is reasonable considering the proportion of overall assets (95%) and liabilities (98%) which are short term in duration.
Furthermore, given the nature of the business and its capital structure, capital gearing at Hargreaves Lansdown is also relatively low and has been reducing consistently over the last five years. This leaves us with little concern over the group’s financial health.
In terms of the dividend, last year management paid out close to 100% of EPS to shareholders in response to what had been another year of exceptional returns. However, we are sceptical of whether or not the board will do the same this year, particularly in light of new product launches and slowing growth.
While the interim dividend announced at the last update was increased by 4%,to 7.3%, we expect that special dividends at year end will be lower this year than in the 2013/14 period.
From a valuation perspective, HL continues to trade at 30 X historical earnings, which is slightly lower than the peak levels experienced in 2013 but above its long run average. The valuation also represents a premium to the non bank financial services sector, which currently trades on 22X earnings.
On balance, we believe that such a valuation is sustainable over the near to medium term. This is most notably because we anticipate that the macroeconomic factors outlined earlier in this report, along with April changes to pension rules in the UK, should help to support client activity at Hargreaves Lansdown. This will have a positive impact upon earnings at the group as well as investor sentiment toward the shares.
After a volatile calendar year Hargreaves Lansdown shares appear to be on the rebound once again, supported by a more optimistic outlook for equity and fixed income markets, as well as the potential for increased levels of client activity as the tax year closes.
Although on a valuation basis, Hargreaves Lansdown is far from cheap, we believe that the group will be able to sustain itself close to current levels over at least the near to medium term.
This is as the shares should draw support from a range of factors including ECB easing in March, new record highs for the FTSE 100, strong European equity markets and negative yields across a reasonable portion of the euro-region.
Each of these factors should help to provide a favourable environment for investors, which could prompt the market to revise upwards its rating for investment service providers.
As a result, we believe it is possible that HL shares could reach highs of 1,205.00 pence before they return toward our fair value price target of 1,098.00 pence for 2015.
On this basis, we assign a near term target of 1,200.00 pence to the shares while we also maintain our 2015 1,098.00 target, in anticipation of a return to this level later in the year.
Our near term target is the result of our belief that brighter investor sentiment toward the group should help to maintain positive momentum in the shares over the near term, while it also corresponds with the 50% retracement off from October 2014 lows. This marked a turning point for the shares in the January 2014 – October 2014 downtrend.
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