Investment Column: Wait for Hargreaves Lansdown to soften
Thursday 03 September 2009
Our view: Hold for now
Share price: 245.7p (-2.3p)
Hargreaves Lansdown is a rare creature indeed – a successful, growing, financial services business. HL yesterday beat analysts' forecasts with a 20 per cent rise in pre-tax profits to £73.1m on turnover of £132.8m, up 10 per cent. That would be a decent enough result in boom times, but is quite exceptional in the current climate. The investment broker has been successful because its platform allows it to keep hold of customers whatever they chose to do with their money.
If they move into cash, for example, it can use bulk purchasing power to offer them a better rate. At the same time, if they move into funds, its Vantage platform enables it to keep the renewal commissions priced into the funds' annual management fees without offering any advice.
The technology used has proved to be a winner and Vantage's structure enables it to add additional customers while incurring relatively little cost. Pretty good going for what was once a run-of-the-mill stockbroker. HL is also advantaged by its Bristol base, which enables it to keep costs down and much lower than they would be if was located in the South East.
The outlook is pretty rosy to. Margins will probably fall on deposit rates, as customers move out of cash, but there is an increasing appetite for equities as the market shows signs of recovery, and this is where the best margins are. The trouble is that the market has caught up with the story and the shares are not particularly cheap.
They trade on 15 times next year's forecast earnings compared to 9.2 times for Rathbone Brothers and 9.7 times for Brewin Dolphin. But then, HL is motoring like a Ferrari while the latter two look more like Ford Focuses. The prospective yield, at 3.7 per cent, is respectable and the company is not shy about paying dividends. HL is going to find it hard to repeat the performance, but then it keeps defying expectations. These shares are a solid Hold, if not better. Hold for now.
Our view: Hold
Share price: 129.5p (-1.2p)
Drew Johnson says that he takes responsibility for not getting the message out on the investment case for Eaga, the residential environmental services group. The result (which was also partly caused by investor nervousness about a relatively new company, he says) is that the market has not fully grasped the Eaga story.
The tale is that the group has just had a very good year: annual adjusted pre-tax profit is up 24 per cent, the dividend is up 17 per cent, and earnings per share spiked by 26 per cent. Mr Johnson, the group's chief executive, says that the majority of its work is driven by regulation, rather than the machinations of supply and demand, and that the country cannot afford to ignore the environmental aspect of Eaga's business.
But that may be the problem. Companies like Eaga were popular during the dark days of the downturn when investors flocked to perceived safe bets – the group got off more lightly than others. However, with punters happier to take on more risk in the last six months, Eaga's share price has comparatively stalled. Yesterday's impressive numbers did little to excite with the shares down 0.9 per cent.
The group has plenty of support among analysts. Those at Panmure Gordon say buy, arguing the stock will reach 175p: "The 2009 price-earnings ratio is 9.4 times, falling to 8.7 times, which is a big discount to its support services peers. The dividend yield is 3 per cent. These are good results and, with an upbeat outlook statement, we expect a positive share price reaction.
"With the ongoing drive to improve energy efficiency, fuel poverty, environment and carbon reduction issues, backed up by government-funded schemes, we reiterate our positive stance."
We would agree that the group is offering a solid performance and the discount would tempt us, but better yields can be found elsewhere and we would expect the share price to stall as investors chase riskier bets. Hold.
Our view: Buy
Share price: 19p (-2.5p)
Taking a bet on 32Red is simple, says chief executive Ed Ware. Operating in just the UK, the online casino group benefits from not offering their services overseas, thus avoiding any unexpected regulations, he says.
Despite that, the group put out disappointing first-half results yesterday, with revenues down 11.2 per cent. It has got better in the first two months of the second half of the year. The biggest risk for 32Red, Mr Ware says, is if the economy implodes as it did toward the end of last year.
The stock was down 11.6 per cent yesterday, but investors were no doubt taking profits after gains of 16 per cent in the last quarter. With no dividend, investors will need more appreciation and, trading on a p/e ratio of 10.4 times, we think it is on the cards. Buy.
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