Hargreaves Lansdown enjoys its most profitable year

Times seemingly couldn’t be better for Hargreaves Lansdown (HL.) as the funds and share dealing platform enjoyed its most profitable year ever on the back of rising interest rates. However, the results raised more questions than answers as the company grapples with changing its direction of travel under its new chief executive, Dan Olley, who took over formally just ahead of these results.

Firstly, investors will need to assess whether the regulation around personalised advice is starting to move in Hargreaves’s direction, if the government is serious about addressing the “advice gap” that is an unintended consequence of “rigid rules” associated with EU regulation. This would allow HL to offer more personalised financial advice to its traditionally sticky client base – retention rates were again above 92 per cent this year.  

Operationally, there was little to fault. Rising interest rates meant that Hargreaves was able to earn a considerable margin on clients’ uninvested cash; interest income during the year leapt from £50mn to £269mn, with the happy consequence that pre-tax profits rose by 50 per cent as a result. The number of active clients increased by 67,000 to top 1.8mn, with a £4.8bn inflow of new business added, which meant total assets under administration was 8 per cent higher at £134bn. Rising interest rates also meant that the active cash savings product proved popular with investors, and it attracted new business of £3.2bn. Meanwhile, underlying costs came in at £315mn, compared with £285mn last time.

Management was restrained in its outlook for the year ahead, seeing a further tailwind for its cash product instead of generating net new investment flows because of the uncertain economic environment. Strategic spending in support of its personalised advice plan is also expected to rise, according to the chief financial officer. In these results, strategic spending was £51.5mn, with £15mn of this capitalised through the balance sheet.

Numis analysts said in a note that HL must counterbalance the lower yield it earns on active savings with the much higher margin available from personal financial advice – it is targeting 25 per cent of inflows to be generated by this segment.

The share price has been on a long losing streak and is not far from multi-year lows, although there were signs of share price recovery in the aftermath of these results. With Numis forecasting a forward price/earnings ratio of 10 for 2024, value is available if management can up the quality of earnings. Speculative buy.

Last IC View: Hold, 903p, 15 Feb 2023