Berenberg says Q1 is 'make or break' for Hargreaves Lansdown

The first quarter of 2020 is "make or break" for Hargreaves Lansdown as investors examine whether weak inflows are the result of temporary factors or increased competition, Berenberg said as the broker cut its price target on the company's shares.

Keeping their 'hold' rating on the stock the Berenberg analysts said it was hard to separate cyclical and structural forces when judging reduced net inflows in the first half of Hargreaves Lansdown's year. They cut their price target for Hargreaves Lansdown shares to 1,820.0p from 1,928.0p.

Investment Association figures show Hargreaves Lansdown accounted for 20.0% of UK platform flows in the second half of 2019, down from 50.0% in 2018. However, overall platform flows fell 30.0% in 2019 and mix effects explain much of the change, the analysts surmised.

Hargreaves Lansdown's management has said customer activity picked up after December's election and that flows have improved in recent weeks. On 31 January, the company reported profit up in the first half but a 9.0% reduction in net new business to £2.3bn.

The analysts, led by Chris Turner, said Hargreaves Lansdown appeared to have had a 20% increase in web searches since the election. Based on that improvement and the approach of ISA season, Berenberg assumed underlying flows of £3.8bn in the second half of 2020, rising to £4.5bn including savings product flows.

"We believe the swing from a weak cyclical environment in Q4 to a stronger environment in Q1 will be important in helping investors calibrate the extent to which lacklustre flows have been a symptom of cyclical factors, rather than structural pressures (that is, competition)," the analysts said. "For this reason, we think Q1 is a make-or-break quarter for Hargreaves Lansdown."

Hargreaves Lansdown's reputation took a knock in 2019 when Neil Woodford's investment business collapsed. Hargreaves Lansdown had recommended Woodford's equity income fund until it was frozen, leaving almost 300,000 of its customers with money tied up.

On Friday, Peter Hargreaves, the company's billionaire cofounder, sold £550.0m of his shares. Hargreaves said the sale was part of a long-term plan to diversify his assets.