Investment Column: Pockets of uncertainty add to risks encircling Hargreaves Lansdown

WH Smith; Air Partner

Our view: Avoid

Share price: 500p (+18.9p)

Hargreaves Lansdown has proved itself to be an impressive business down the years but it is fair to say that the investment manager now faces some powerful headwinds. First it should be said that the trading update last night was very much what we have come to expect from the business.

Despite the all-pervasive gloom surrounding the economy – and the stock market – Hargreaves still took in £680m of client funds for the three months ending 30 September. That is a 24 per cent increase on the first quarter of 2010. Meanwhile revenues were up 27 per cent to £57.2m while client numbers rose by 8,000 to 388,000.

The value of the assets that Hargreaves administers slipped by 9 per cent to £22.3bn thanks to the falling stockmarket. Nonetheless its performance has been very impressive – and the first quarter is usually its quietest. The trouble, as the company has noted, is that current conditions mean that clients have started to put off making investment decisions.

In general, equity markets ought to be attractive given the pitiful returns available from holding money in cash. But the recent turbulence is making investors pause for thought. When clients change their asset allocation, Hargreaves does not lose out because they keep the money on its widely admired Vantage platform. But the amount of new money coming on to that platform will probably now slow. Then there is the Financial Services Authority review of the way retail investments are sold and, of particular note to Hargreaves, its proposals to change how platforms like Vantage can be remunerated.

The company has said the proposed changes might not hit it as hard as analysts think and that it is lobbying hard. Nonetheless all this adds to the uncertainties the business is facing.

We said take profits in February at 570p, which was the right move. With the shares trading on 24 times full-year forecast earnings (albeit with a decent prospective yield of 3.5 per cent rising to 4.6 per cent) now is not the time to jump back in.

WH Smith

Our view: Buy

Share price: 530p (+2.5p)



We decided to back WH Smith at the start of this year despite news of falling sales and concerns about the pressure on consumers. One of the main reasons was its focus on margins, which suggested that profits and the dividend would be protected from the downturn. And last night we had proof in the shape of the retailer's full-year figures.

Profits before tax were up as gross margins rose by 150 basis points year on year. Sales were pressured but that is to be expected. But the company's focus on preserving margins and driving cost savings means that WH Smith continues to look in far better shape than some of its peers on the high street.

This is important. The consumer is under pressure. And that pressure looks set to get worse in coming months as economic growth slows and inflation moves higher. Retailers will be hit. And the market will exercise caution when it comes to backing stocks in the sector.

Investors will thus gravitate towards companies that are best positioned to protect margins and dividends. In other words, it will go for businesses like WH Smith, which upped its payout for shareholders by 15 per cent year yesterday.

We bought in at just over 480p. Though its done well since, at around 10 times forward earnings, with a prospective yield of more than 4 per cent, we think there is more to come.

Air Partner

Our view: Buy

Share price: 337.5p (+7.5p)



Shareholders in Air Partner received a welcome boost yesterday after the jet charter group announced a 93 per cent surge in pre-tax profits to £5.3m for the year to the end of July. The result was underpinned by the company's decision to focus on core broking, which paid dividends in a tough market.

The group, which reported a 23 per cent rise in revenues to £282m, also confirmed that its chairman, Aubrey Adams, would resign from his post once a successor has been appointed.

Air Partner is the only aviation business with a royal warrant and organises air travel for some of the world's top dignitaries. The group had struggled in the economic downturn and its shares have been under pressure this year. Recent sessions have seen some encouraging gains but they remain well below the levels at the start of 2011.

The positive results gave the shares another much-needed lift, although we would note that the company remains cautious about the outlook for the economy and, in turn, its market. Still, the update shows that Air Partner's strategy is sound.

This evidence and the accompanying boost to the dividend – Air Partner boasts a prospective yield of well over 5 per cent – could drive a further re-rating in the shares. The fact that they trade on less than 10 times forward earnings also helps.

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