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.

Suggested Topics
PROMOTED VIDEO
News
Russell Brand at an anti-austerity march in June
peopleActor and comedian says 'there's no point doing it if you're not'
Arts and Entertainment
Banksy's 'The Girl with the Pierced Eardrum' in Bristol
art'Girl with the Pierced Eardrum' followed hoax reports artist had been arrested and unveiled
Voices
Oscar Pistorius is led out of court in Pretoria. Pistorius received a five-year prison sentence for culpable homicide by judge Thokozile Masipais for the killing of his girlfriend Reeva Steenkamp
voicesThokozile Masipa simply had no choice but to jail the athlete
Arts and Entertainment
Sister Cristina Scuccia sings 'Like a Virgin' in Venice
music

Like Madonna, Sister Cristina Scuccia's video is also set in Venice

News
i100
Arts and Entertainment
James Blunt's debut album Back to Bedlam shot him to fame in 2004
music

Singer says the track was 'force-fed down people's throats'

News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
The Tinder app has around 10 million users worldwide

techThe original free dating app will remain the same, developers say

News
news

Endangered species spotted in a creek in the Qinling mountains

News
peopleJust weeks after he created dress for Alamuddin-Clooney wedding
Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Life and Style
health

Some experiencing postnatal depression don't realise there is a problem. What can be done?

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album