Analysts divided on Hargreaves ahead of platform study

JP Morgan Cazenove has downgraded Hargreaves Lansdown arguing its high price tag fails to reflect regulatory uncertainties, while Numis Securities has argued the retail platformer is a “structural growth story” with room for further earnings growth.

Hargreaves

Analysts at the investment bank slashed the retail platformer’s ranking from neutral to underweight on the basis that its valuation does not reflect the “regulatory uncertainty” in the sector, such as the outcome of the impending FCA platform study.

JP Morgan Cazenove expects the retail platform’s full year earnings in 2018 to grow 12%, which is 2% lower than the consensus view of 14%.

Of the six listed managers covered in the JP Morgan Cazenove report, which includes Jupiter and Schroders, Hargreaves Lansdown is the only firm to receive an ‘underweight’ ranking.

Platforms review

The FCA Investment Platforms Market study, due out on Monday, will contain the regulator’s findings on whether platforms like Hargreaves help consumers make good investment decisions and deliver value for money.

The watchdog has previously published data which suggests platform providers’ best buy lists are significantly more likely to include “affiliated funds”, their own brands of products or ones they have commercial ties to, thereby creating a potential conflict of interest.

JP Morgan Cazenove said “uncertainty over the outcome is unlikely to be helpful for sentiment”.

It added that “sources of upside earnings surprise are limited”.

Hargreaves, led by chief executive Chris Hill (pictured), is due to publish its final results on 7 August. The firm told Portfolio Adviser it does not comment on other analysts’ decisions and reviews.

Structural growth story

Hargreaves Lansdown’s valuation premium has agitated many investors.

The D2C firm is currently trading at a price to earnings (P/E) ratio of 46x, according to stats taken from its website.

Its P/E ratio has risen 58% from 29x at the end of June 2017.

Others have argued that Hargreaves’ shares and earnings potential have further to go.

Nick Train, who holds the stock in his Finsbury Growth & Income trust, has argued Hargreaves justifies a higher price tag because it is a technological disruptor.

Numis Securities agrees Hargreaves is a “structural growth story” and should remain so “possibly for decades to come”.

The broker said it expects Hargreaves and other D2C retailers to benefit from two structural drivers: the shift from institutionally managed defined benefit pension schemes to retail managed defined contribution schemes and the shift to individually managed portfolios away from adviser-managed wealth.

“We see these core growth drivers delivering teens percent growth for a generation even if HL doesn’t continue to take market share”.

Hargreaves currently holds 38.2% market share of the platforms business, making it the dominant player in the space.

Hargreaves versus SJP

JP Morgan Cazenove said it sees “a more attractive relative opportunity” in a business like St James’s Place which is “seeing similar flow dynamics at a more attractive valuation”.

The investment bank noted that inflows into Hargreaves have slowed as the business has grown and now match the level of inflows and assets under management (AUM) at SJP.

“Despite this convergence in flows, Hargreaves has seen its valuation premium to SJP expand by approximately 50% in the last 12 months,” it said.

Active savings roll out

JP Morgan Cazenove cited the “slower roll out” of Hargreaves Lansdown’s active savings product as another reason for downgrading the D2C platform’s earnings.

Numis said it was too early to include the cash savings business in its forecast and valuation.

But the broker said this nascent part of the business could add 5 to 10% into the teens to the generous per annum growth rate Numis expects from Hargreaves. It expects Hargreaves’ earnings to grow 14% in 2018, which is in line with consensus.

“We see the savings opportunity as being the beginning of a potentially much greater and more comprehensive financial services offering to clients.”

Hargreaves expects it will have a live proposition ready to launch by the end of this year.

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