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Hargreaves Lansdown discounted for clarity

The platform broker's shares have taken a hammering but the underlying business looks solid
August 5, 2022
  • Investors reluctant to trade shares
  • Fund business holds up well

Turbulence is always a problem for large platform brokers and Hargreaves Lansdown's (HL.) results showed how a market pullback can adversely affect retail investor sentiment, with negative consequences for the bottom line. The situation can basically be summed up as: 'investors buy shares when market go up and sell, or do nothing, when they fall'. Apart from illustrating some uncomfortable truths about behaviour during times of market exuberance, this is also the reason why management can’t offer more precise guidance on the progress of its strategic transformation plan, on which the company will lavish £175mn between now and 2026.

The operational side of the business performed respectably under the circumstances. HL’s consistent marketing spend meant it added a net 92,000 customers to the platform. The resulting fund inflows somewhat offset the intervening market turbulence and assets under management (AUM) were £124bn, compared with £135bn this time last year.

Although funds are HL’s biggest business segment, volumes of share transactions, on which it earns significant fees, are higher yielding and the weakness in investor sentiment was most obvious in this side of the business. AUM for shares was higher at £52.3bn, but investors sitting on their hands meant a far lower revenue margin of 37 basis points, which meant share revenues fell by 24 per cent to £195mn for the year. Transaction revenues related to share commission was down 30 per cent to £169mn.

Interestingly, funds revenue held up better – many providers report high demand for absolute return funds – with the revenue margin hovering around 40 basis points, inflows in the funds segment generated significant operational gearing and revenues here were £255mn, compared with £233mn last time.

Management also seems prepared to underwrite significant running costs while its business investment program is ongoing. Total underlying operating costs were £285mn in FY2022, with further investment costs of £21mn, plus the £7mn annual expense of running dual technology systems until its new IT is up and running.  

The market is clearly waiting to see whether HL can deliver the revenue growth it experienced over the past 40 years via its investment program. Broker Panmure Gordon currently forecasts a PE ratio for 2023 of 19, with a projected dividend yield of 4.8 per cent. That is historically cheap for the company, but the question is whether it is now being discounted for the maturity of its business, rather than for current market travails on their own. Hold.

Last IC View: Hold, 1,138p, 22 Feb 2022

HARGREAVES LANSDOWN (HL.)  
ORD PRICE:873pMARKET VALUE:£4.1bn
TOUCH:872-874p12-MONTH HIGH:1,626pLOW:759p
DIVIDEND YIELD:4.5%PE RATIO:19
NET ASSET VALUE:121pNET CASH:£473mn
Year to 30 JunTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201844829249.732.2
201948130652.133.7
202055137866.137.5
202163136662.638.5
202258326945.639.7
% change-8-27-27+3
Ex-div:22 Sep   
Payment:24 Oct