Hargreaves Lansdown had already primed the market for a stretch in the timing of hitting 2026 growth targets, but the surprise departure of the investment platform’s boss could pave the way for those ambitious goals to be scrapped altogether. Resetting medium-term market expectations could be no bad thing.
First-quarter revenue increased by 15 per cent, ahead of expectations, as rising interest rates have pushed up the returns generated by Hargreaves on cash held in client accounts. Revenue margin guidance has been raised to between 49 and 52 basis points, against the 44 to 47 range previously expected.
Analysts have raised earnings forecasts in response, with Numis increasing its figure by 5 per cent to 56.2p a share for this year, which also would represent an increase on the 50.4p-a-share figure recorded last year.
Consensus earnings forecasts have risen steadily since August and yet Hargreaves’ shares are valued more cheaply than they have been in at least nine years, at just over 14 times forward earnings. For context, that is below a multiple of 21 at the pit of the March 2020 stock market crash.
So why are investors so pessimistic about Hargreaves? The problem is that the same catalyst for rising interest rates is just what is sapping the growth prospects from the FTSE 100 constituent’s core investment platform business. Rapid inflation might be causing central banks to increase rates more rapidly than expected, but it is also squeezing household finances and causing investors to retreat from trading. Investors are less willing to pay a big price for companies promising considerable future growth — and the present lofty targets at Hargreaves fit that bill.
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The ambition to achieve net inflows of £20 billion by 2026 — £5 billion of which to come from active savings and another £5 billion from launching a new hybrid financial advice product — was announced the day before the Russian invasion of Ukraine and the market meltdown that followed.
Even if you strip out the £5 billion that Hargreaves hopes to gain by launching its new advice product, achieving those targets still requires a significant acceleration in the pace of winning new customers. Achieving £15 billion of inflows implies a compound annual growth rate of 28 per cent in net new business by 2026. A new boss might want to recalibrate those targets when Chris Hill, the present chief executive, leaves Hargreaves by November next year at the latest.
The latest market volatility is a pit to climb out of. Analysts have forecast net new business of £5.7 billion this year, but all the £700 million in net new business in the first quarter was in lower-margin active savings products. Even if you assume the level of flows into those products will remain steady over the rest of the financial year, hitting consensus forecasts implies that the core business — mainly equities and funds — gains £2.9 billion in net new business by Hargreaves’ year-end next June.
Some analysts are more sceptical; before the first-quarter numbers earlier in the week, Shore Capital was forecasting new business of £4.8 billion. But it is worth remembering that new flows were weaker than the market had anticipated.
Weaker new business also begs the question of where the growth comes from once the period of rapid interest rate increases has passed. Markets are pricing in a peak in the base rate next May.
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More realistic ambitions set by Hill’s successor would be a start in Hargreaves winning back market plaudits.
ADVICE Hold
WHY The shares may struggle to move higher while medium-term growth targets look a stretch
Bellway
The cushion that had been shielding housebuilders against elevated inflation in building costs has been removed. For Bellway, the housing market havoc caused by the mini-budget has exacerbated pressures on the cost of living that were already stymieing demand. The result? A decline in reservations of private houses of about a third since September and sales volumes set to be flat in this financial year, compared with the previous 12 months.
Cost inflation is between 7 per cent and 10 per cent, which means guidance for operating margins this year has been set at a more vague “over 18 per cent”, compared with the 19 per cent anticipated three months ago. Analysts at Numis cut their profit forecast for the present financial year by 10 per cent to £610 million, lower than last year’s £650 million. Surpassing the 18 per cent margin threshold depends on completions volumes and sales prices holding firm, outcomes that look more precarious than they did a month ago.
The order book at the end of July was still almost 5 per cent higher in value than it was at the same point last year and after taking into account the number of homes that have exchanged, roughly 65 per cent of anticipated units for completion this year are already secured.
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Net cash at the end of July next year is expected to be not too far below the same point last year at about £200 million. If the company cuts back on land-buying and completion volumes next year, there is a chance that cash balances could rise further.
What does this mean for Bellway’s beefy dividend? A plan to reduce the level of earnings cover for the dividend to a ratio of 2.5 by 2024, from three, still stands, but that needs to be balanced against the likely prospect of lower earnings. Analysts expect a payment of 131p a share this year, below the 140p recommended for last year, which would correspond to a potential yield of 7.4 per cent at today’s share price. The shares are priced at a substantial discount to the long-running average, but the risk of a cut to earnings guidance means Bellway’s low valuation shouldn’t be seen as a buying signal.
ADVICE Hold
WHY The dividend might be reduced but it should still amount to a generous yield
