Hargreaves Lansdown (LSE:HL.) shares bounced this week but still trade 60% below where they were five years ago. As the UK’s largest savings and investment platform, the company skyrocketed on better-than-expected inflation data, outpacing much of the index.
Robust performance
That improved data was positive for pretty much all UK-based companies. There’s now less pressure on the Bank of England to raise interest rates again as part of a monetary tightening policy intended on slowing the economy.
For Hargreaves, this development could translate into a stronger economy and an eventual resolution of the cost-of-living crisis. In turn, this means Britons should have more money available for investments and savings.
However, it’s important to note that Hargreaves hasn’t been lagging in the current economic environment. In a recent trading update, the firm announced it achieved net new business of £1.7bn in the last quarter, representing a noteworthy 6% increase compared to the previous quarter.
Share dealings were 11% lower than the previous quarter and 12% lower than prior year reflecting caution from investors. Meanwhile, asset retention fell, as expected, as “cohorts of clients are making cash withdrawals to fund cost-of-living increases”. Further economic decline could exacerbate this trend.
Nevertheless, the firm saw active client growth of 13,000 in the quarter. This reflects continued robust performance throughout the last 18 months that has certainly surprised some analysts.
A huge tailwind
The trading statement this week didn’t include financials. That’s coming in early August. But I’m expecting to see a huge tailwind in the form of higher returns on customer cash deposits.
Approximately 12% of the £132bn of consumers’ assets on the platforms are held in cash, totalling around £13.5bn at the latest count. Hargreaves then lends out this money to the market at a higher rate than its customers receive.
Despite the challenging trading environment, Q3 revenue surged 28% year on year, primarily driven by an increase in net interest margin, which compensated for reduced share dealing volumes and lower average asset values.
And according to the company, this reflected “a continuation of the increase in net interest margin, which more than offset the impact from the reduction in share dealing volumes and lower average asset values during the period”.
With interest rates surging even higher in the last quarter, I expect to witness a substantial year-on-year revenue increase for Q4.
Still undervalued
Hargreaves Lansdown appears undervalued at 18 times earnings, and considering analysts’ EPS forecast of 67p in 2023, the forward price-to-earnings ratio is around 14, aligning closely with the FTSE 100 average.
To me, this valuation is highly attractive, particularly considering the promising long-term trends the business is poised to leverage. Its compelling growth proposition aligns with the increasing number of Britons seeking greater control over their personal finances.
It’s current performance also highlights the robustness of its business model, performing well in an economically unfavourable environment. It also offers a 4.2% dividend yield.
