Liberum downgrades Hargreaves Lansdown, points to consensus downgrades

Liberum downgraded Hargreaves Lansdown to ‘sell’ from ‘buy’ pointing to further downside risks.

The brokerage said that while there is no doubting the company’s “formidable” track record and the strength of the business model, trading on a price-to-earnings of 36x with the prospect of consensus downgrades and significant industry headwinds, the risk/reward is unfavourable.

It pointed out that full-year 2016 results were 4-5% ahead of expectations, helped by a more positive market movement than originally expected, with group net income margin slightly ahead of Liberum’s forecasts at 0.56%.

However, the cut to base rates means Hargreaves will now earn significantly less income from clients’ cash balances.

Liberum noted guidance for FY17 was to expect a margin of 0.35%-0.45% and said it now assumes 0.40%, down from 0.53%.

“Guidance was not forthcoming for FY18, however, our forecast assumes 0.25%. If the Bank of England reduces further, possibly to 0.10%, that would result in a further loss of £11-13m per annum in FY18 & FY19, an additional 4-5% downgrade to earnings,” it said.

“All things being equal, we would need to see the shares at about 1100p before we became buyers,” it said.

At 0940 BST, Hargreaves shares were down 3.8% to 1,268p. The stock went ex-dividend on Thursday.