Hargreaves Lansdown pulls in horns amid uncertainty

Hargreaves Lansdown said it "watchful" and had begun "moderating" its rate of investment in the business amid challenging markets, as first-half results came in below expectations.

In the six months to 31 December the savings and investment platform won net new business of £2.5bn and 45,000 more active clients but assets under administration shrank 6% since the end of June to £85.9bn due to market movements in the final quarter of the calendar year.

New business was boosted by Hargreaves new Active Savings cash savings scheme that allows customers to pick and mix fixed-term savings products from a range of banks and building societies through one online account. This brought in £281m of net flows in the second quarter, slightly offsetting the effect of falling investor confidence on the core Vantage fund supermarket business.

Excluding Active Savings, implied net inflows in the second quarter slowed to £0.9bn following £1.3bn reported for the first. The big wobble in global stock markets since October was reflected in a sizeable second-quarter negative market movement of £9.4bn.

Half year revenue of £236.4m was up 9% on the same period the prior year, but short of the £240m average analyst forecast. Likewise, profit before tax of £153.4m was up 4% year-on-year but short of the £156m City consensus, with earnings per share also up 4% to 26.1p versus a consensus estimate of 26.6p.

The interim dividend was lifted 2% to 10.3p per share, again slightly short of the 10.9p that was expected.

Chief executive Chris Hill said: "The diversified nature of Hargreaves Lansdown has enabled us to continue growing despite a period of geopolitical uncertainty, market volatility and weak investor confidence."

This included growing Active Savings by reducing revenue margins to ensure the rates offered on Active Savings are more competitive.

But following a period of elevated cost growth across the group to position the business for what is seen as a significant long-term market opportunity, he said "we are now moderating the rate of investment and remain watchful about the rate we put new costs into the business whilst market conditions remain challenging".

He noted that the market conditions that have driven industry-wide net outflows in recent months, with the Investment Association reporting the three months to November was the worst ever period for industry net retail fund outflows, and is also reflected in HL's own UK measure of investor confidence, which is at its lowest point since the index was launched in 1995.

Noting that the company has maintained a visible brand and marketing presence during this period, he said he believed the company had continued to maintain its leading position in the market. "For example, it is pleasing to see that whilst dealing volumes for the industry across the period have been subdued, we have managed to increase our share of the execution only stockbroking market to 31.9%."

On Brexit and the early-April tax year end, he said: "Such uncertainty during our busiest time of year is clearly not helpful for predicting new flows and business volumes, but we will be prepared operationally to deal with any outcome."

HL shares, having grown 125% between the start of 2015 and the all-time high of 2280p last September before losing almost a quarter in early October, fell another 5% to 1,703.5p on Tuesday.

Analyst Stuart Duncan at Peel Hunt said the interim are modestly below consensus and the dividend was "modestly disappointing". He expected the consensus to be cut by circa 5%.

The company "remains a flowmonster, dominating the direct to client platform space", said analyst Paul McGinnis at Shore Capital.

"Having recently negotiated bigger discounts for clients from fund providers as part of its relaunched Wealth 50 list of favourite funds, we don’t see any immediate pressure on HL’s own platform fees. And if Active Savings can start to make serious in-roads into the deposit market (like HL’s Vantage platform did to the funds market twenty years ago), then we see HL as a business model with a very wide moat."

But, taking account of the mark-to-market downgrade from the movements in the last quarter, he said that "much as we love the business, we would wait for a better opportunity before upgrading".

House broker Numis noted that HL in September reported that the savings business had attracted £100m of customer money in the first quarter and £281m driven by increased marketing activity in the second. "HL is still only addressing its Fund & Share account (c.25% of AuA) and it is also still to add instant access accounts and consequently we would deem the current flow rate as a success that validates the opportunity."

Numis's revised EPS forecast for the year falls to 50.7p from 50.9p but a little more significantly next year to 56.1p from 59.0p.