Hargreaves profits surge amid Brexit share frenzy, but shares downgraded

Boosted by a much-elevated level of share dealing since the Brexit vote, Hargreaves Lansdown posted much improved half-year profits and hiked its dividend 10%.

The investments and pensions group processed 1.95m stockbroking deals in the six months ending 31 December, a 51% increase on the previous year, which saw its market share jump to 28% from 23.8%.

However, net new business inflows were down 7%, if excluding the Jupiter and JP Morgan client acquisitions the prior year, with a 22% drop in the first quarter followed by a 10% rise in the second.

Despite the inflated equity dealing, there were increased cash withdrawals post Brexit, but client and asset retention remained strong and almost unchanged at 94.7% and 93.5%.

And at the end of 2016 the number of total active clients stood at 876,000, 40,000 higher over the six months, with total assets under administration climbing 13% to £70.0bn.

Net revenues leapt 16% to £184.8m, while good cost control led to profit before tax surging 21% to £131m, which was ahead of the consensus PBT forecast of £121m and EPS of 20.5p.

After the Bank of England base rate cut in August the net revenue margin on cash fell to 0.51% from 0.55%, though this was better than expected, and directors expect it to be in the range of 0.40% to 0.50% for the full year.

Nevertheless, earnings per share were up 22% to 22.4p and the interim dividend was hoisted to 8.6p.

Looking forward, management seemed uncomfortable providing precise guidance due uncertainty over whether the elevated post-Brexit level of share dealing is a short term effect or a newly sustainable level, "however, elevated levels of trading continue with no sign of material reduction six months on from the Brexit vote" and traditionally the second half of the trading year is consistently the stronger for new business.

"The diversified nature of the Hargreaves Lansdown business has enabled us to deliver significant growth in both revenue and profit," said chief executive Ian Gorham.

"Despite macroeconomic uncertainties impacting investor confidence and net new business, clients continue to trust us with their money and benefit from our market-leading investment services."

Hargreaves shares initially spiked to a year's high above 1,421p before dropping off.

This came as house broker Numis downgraded its rating on the stock to 'hold' from 'buy' due to its recent strong run.

Analyst James Hamilton said PBT was 10% ahead of his estimate due to better than expected cost control combined with the good revenue growth, although AuA were a little behind his forecast of £70.8bn and net inflows were strong at £2.3bn but short of the £2.9bn he expected.

Full year forecasts were upgraded 6% to 43.4p from 40.9p and 49.5p from 46.8p for 2018.

"With the structural growth in self provision, online investing we continue to believe that HL deserves a substantial premium valuation," the analyst said, but while the target price was lifted to 1,497p from 1,458p the recommendation was moved down.