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A very direct threat: why UBS is a Hargreaves Lansdown bear

A very direct threat: why UBS is a Hargreaves Lansdown bear

Shares in Hargreaves Lansdown are under renewed pressure after UBS issued a detailed note on why investors should sell the stock.

In a 71-page report penned by analysts Gregory Simpson and Arnaud Giblat, UBS slapped an 850p price target on HL. This triggered a sell-off and at 12.10pm shares had lost a further 3% to sit on £10.50, leaving them some 23% below the level they started 2014.  

While some may see this as a buying opportunity, UBS, which has just initiated coverage of Hargreaves, has advised investors to beware, pointing out the stock still looks expensive on a series of overestimations of the Bristol-based wealth firm's prospects.

One of these is the overestimation of HL’s potential to attract inflows.

‘To drive the earnings growth that would take Hargreaves Lansdown to a 'normalised' 20x P/E multiple from 29x FY15E at present, we estimate the company's flagship Vantage platform has to draw in 25% net flows each year over a  three year time horizon,’ Simpson and Giblat said.

‘This acceleration looks challenging given HL achieved  20% flows in CY (calender year) 2013, the year when HL shares doubled as the regulatory boost from the retail distribution review came into play.’

UBS questioned the bull case scenario, which lies on the ‘advice gap’ where masses who no longer have access to financial advice will choose to invest through Hargreaves.

‘We see a three-year £30 billion opportunity and HL capturing 25% of this would lead to an extra 6% net flows and adds 5% to EPS each year;' Simpson and Giblat said.  

‘However delivery of this bull case appears doubtful given adviser numbers fell significantly in 2012 and have since stabilised. In this two-year period of disruption, HL added less than 200,000 clients compared to the 5.5 million cited to be in an advice gap.

‘To us this suggests a mass-market UK population that without financial advice will stick to cash savings – year-on-year cash ISA deposit growth at banks has remained at 5-10% despite zero interest rates.’

Direct competition

While UBS sees HL as well-positioned to benefit from the changing landscape in the retail market with the DIY investment space growing in the wake of the retail distribution review, it believes its dominant position is under threat.

Simpson and Giblat said: ‘We are most concerned about some of the bigger players in the adviser platform space getting involved in the self-directed market as they reach across the value chain to offset the significant pricing pressure they have seen.’

The pair highlighted a number of significant moves, including Cofunds’ announcement it had added a self-direct service for orphaned clients. It also drew attention to the threat from Aegon, Standard Life and Aviva, which have thrown down their D2C markers recently. 

‘We do not think these players necessarily have to succeed in direct – just being able to retain orphaned clients on their platforms would reduce the advice gap flow opportunity the HL bull case prices in,’ Simpson and Giblat said.

‘We see upside risk to HL's share price if the company continues to win market share from peers. Equally, new players entering the market with big pockets could take share and be a source of downside risk.’

HL is scheduled to publish 2014 results on the 3 September.

In its last interim update, it revealed assets under administration increased by £2.3 billion in the three months to 31 March to hit a record £45.7 billion.

Inflows for the quarter also broke records at £1.83 billion, while new Vantage clients rose by 33,000 to lift the number of active clients on the platform to 617,000 as at 31 March.

Chief executive Ian Gorham (pictured) remained confident about his firm's prospects in a statement accompanying the update.

'Having delivered the regulatory change our development capacity can now return to assisting in augmenting the momentum we have built up,' Gorham said. 

'We look forward with optimism to a successful full year and new and exciting opportunities.' 

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