Investor concerns about margin pressure at Hargreaves Lansdown (HL.) completely offset record full year revenue, profit and assets under administration (AuA). That led to a 5% slump in the shares in the UK stockbroker to £10.81.
While the results were roughly in-line with consensus forecasts, according to Liberum analyst Justin Bates, the market was always likely to place a greater emphasis on Hargreaves’ outlook to see if it could continue to support a lofty price to earnings (PE) ratio of 32.
‘It has continued to demonstrate its prowess at harvesting assets but margin pressure, a result of RDR [the Retail Distribution Review], is creating an environment that makes it difficult to deliver double-digit earnings per share growth and therefore justify a forecast of calendar year 2014 price earnings ratio of 32-times,’ says Bates, who has a sell rating on the stock.
RDR, which was introduced in April, is a regulatory framework for financial companies on how to deal with and provide advice to retail clients. The changes have required a significant amount of management time, according to Hargreaves Lansdown chairman Michael Evans. The introduction of the regulations has meant an overhaul in the way it charges clients holding fund investments.
‘Notwithstanding these challenges, the group has once again increased both profits and assets under administration as we achieved record new business flows and record new client numbers, Evans says.
Net revenue up 8% at £292 million, profit before tax up 7% at £210 million and AuA up 29% at £46.9 billion all represented record numbers for the UK’s largest stockbroker. The problem Hargreaves faces is that despite very significant growth in AuA, revenues and earnings are only around a quarter of that rate, which is indicative of increasing margin pressure in the industry.
These results highlight the challenges faced by HL, where AuA can rise 29% but flow through to just an 8% increase in revenues and 7% on the adjusted pre-tax profit line. 'The negative impact of this unrelenting revenue margin pressure shows no sign of abating,' says Evans, adding 'we think 9% earnings per share (EPS) growth achieved in 2014 is indicative of the new normal.’
