23rd Feb 2022 15:57
(Alliance News) - Shares in Hargreaves Lansdown PLC stabilised on Wednesday after plunging the day before on concerns about the amount of investment required to maintain the fund supermarket's position atop the UK retail investment market.
Analysts at Credit Suisse said the market reaction was "incorrect", and the FTSE 100 stock is now oversold.
Hargreaves Lansdown was up 1.6% at 1,112.50 pence on Wednesday afternoon, having dropped 15% on Tuesday.
In the six months to December 31, pretax profit slumped 20% to GBP151.2 million from GBP188.4 million, the company reported on Tuesday. Revenue in the first half slipped to GBP291.1 million from GBP299.5 million.
Chief Executive Chris Hill said: "In the first half of this financial year, we saw a gradual return to the office and calmer markets which led to more normalised share trading levels, albeit still higher than before the pandemic. Our assets under administration have reached record levels, and we now have a record 1.7 million customers."
Hargreaves ended the first half with assets under administration of GBP141.2 billion, up 17% from GBP120.6 billion at the same point the year before, and 4.2% higher from GBP135.5 billion six months earlier.
The firm recorded GBP2.32 billion in net new business in the first half, down from GBP3.24 billion the year prior.
Hargreaves declared an interim dividend of 12.26 pence, up 3.0% from 11.9p a year before, but noted it will halt any special dividends for the next couple of years to focus instead on increased investment.
"Through financial 2022 and financial 2023 we will fund the planned investment spend, in part, through the suspension of our special dividend but will reinstate it from financial 24 onwards. We will maintain a 3% per annum growth rate in our ordinary dividend for financial 2022 and financial 2023 whilst the special dividend is suspended, reflecting the confidence the board and management have in the company's financial and strategic outlook," Hargreaves explained.
Over the next five years, from financial 2022 through financial 2026, Hargreaves plans to spend GBP175 million in "strategic investment cost to deliver future growth and operational efficiencies".
As part of that growth, Hargreaves expects net new business to grow to high-single digits as a percentage of opening AuA by financial 2024 and then rising to about 10% by financial 2026, which the company noted would represent about GBP20 billion net new business in financial 2026.
"We will simultaneously drive improved client acquisition to achieve a client base of about 2.1 million by financial 2024 and about 2.6 million by financial 2026," Hargreaves added.
Haley Tam and Ella Hughes of Credit Suisse said the market reaction to the investment plan set out by Hargreaves was based on calculations that pushed near-term results expectations 15% to 20% below consensus.
The calculations applied the planned investment spending against "modest" revenue margin and operating margin guidance, but this ignores the company's "significant uplift" to its medium-term outlook, the two analysts said.
Hargreaves guided 42 to 44 basis points in revenue margin in the medium term. This assumes a cash yield of 40 to 45 basis points in financial 2023, rising to 60 in 2024, but Credit Suisse thinks actual cash yields will be 70 basis points in financial 2023 and 80 in 2024, as the Bank of England raises interest rates.
Hargreaves earns interest on uninvested cash held in client accounts.
Credit Suisse also said the market is applying the wrong multiple to the investment spending planned by Hargreaves, as the cash outlay needs to be split between operating costs and capital expenditure.
While the bank lowered its price target for Hargreaves shares to 1,530p from 1,590p, based on a discounted cash flow valuation, it maintained its 'outperform' rating.
"As the company speaks with investors over coming weeks, we expect the market to be more willing to look at adjusted versus statutory earnings near term," Tam and Hughes said.
By Tom Waite; [email protected]
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