Hargreaves shares slide on price war concerns

<p>Hargreaves Lansdown Plc., the British financial services and investment management group has unveiled strong full-year results helped by the continuing strength of equities markets. However […]</p>

Hargreaves Lansdown Plc., the British financial services and investment management group has unveiled strong full-year results helped by the continuing strength of equities markets. However shares are trading 3.3% lower this morning (3rd September) with investors wary the group might be drawn into a pricing battle over fees for Exchange Traded Funds.

Hargreaves announced on Wednesday morning a 25% increase in net business to £6.4bn and said it had added 144,000 new clients in the year to the end of June. This enabled Hargreaves to increase total assets under administration by 29% to 46.9bn, the group added.

Net revenue increased 8% to £291.9m whilst operating profit increased by a similar amount to £208m, although Hargreaves’ margin on net revenue edged down to 71.3% from 71.5% in the year before.

Even so, FTSE 100-listed Hargreaves posted a pre-tax profit increase of 7% to £195.2m, enabling it to increase the final dividend by 32p per share, comprising of a second interim dividend of 15.39p and a rise in special dividend of 9.61p.

“A busy year of stock market activity has been beneficial to Hargreaves Lansdown in terms of adding new clients and new business. Of particular note was the Royal Mail flotation, where around 118,000 people, approximately 18.5% of the UK public who invested in Royal Mail shares, did so through Hargreaves Lansdown,” it said.


Market seems wary of a looming ETF price war

After initially trading firmer soon after the market open, the stock erased its gains and fell into the red.

The company has not given prominence, in its full-year report, to a number of factors investors have been watching which may pose a risk to some of Hargreaves’ businesses. For instance, whilst not a direct provider of annuities itself, Hargreaves may experience some impact from the UK Chancellor’s Exchequer’s reforms of the pension markets removing the obligation for savers to purchase an annuity.

Additionally, a fairly recent trend of fee reductions for fund administration fees—passive and managed–is also another question Hargreaves may face.

Finally, there appear to be signs of the risk of a price war amongst passive fund providers, like Hargreaves, with the focus on fees for exchange traded funds (ETFs) after recent cuts in fees for ETFs by large American investment management firms BlackRock and Vanguard.

Despite these niggles, Hargreaves continues to be in an enviable position in the broad UK sector with its quite peerless 97% return on equity, net margin at 51% and, crucially, an interest coverage ratio of capability of 20.2.

The latter ought to sustain the shares through a forthcoming rebalancing of the competitive environment.

Even so, with price-to-earnings at a prospective 29.2 and prospective yield still showing room for improvement at 3.1%, there are doubtless stories in this sector offering a better entry point for investors than Hargreaves.

The chart below seems to corroborate that view. Like the stock prices of many of its peers that came to market around the same time, Hargreaves’ stock is off all-time highs reached earlier this year. After a satisfactory year and with the challenges of a new one ahead, the share price reaction seems fair.




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