Why Citi remains convinced Hargreaves Lansdown is a sell

Analysts at Citi have reiterated their recommendation to ‘sell’ shares in Hargreaves Lansdown, even though there was ‘much to cheer’ in the broker’s results this week.

Hargreaves Lansdown reported record revenue, profits and assets under administration in the six months to the end of December, with pre-tax profits up 30% to £93.7 million.

The market welcomed the numbers, delivered Wednesday, with shares jumping by some 8% on the day.

They have since given back 1% to end last night on 808.5p, just shy of their 12-month high of 817p.

Citi is advising investors to continue taking profits from the group as it ‘remained concerned’ by the group’s dependence on what it describes as ‘low quality’ revenue, as well as signs of rising cost growth.

The analysts’ earnings per share forecasts – 20% this year and 17% the following – also assume no revenue margin pressure from the retail distribution review. ‘We believe this feasible risk should be reflected in a discounted P/E,’ they added in a note to clients.

Among their chief concerns is rising cost, with operating expenses rising 15% year-on-year, including staff costs up 17%, while marketing and distribution spending was up 22%. ‘With the inclusion of Sipp Loyalty Bonus costs from 1 Jan 2013, we forecast cost growth rises to 21% H2-H2, before returning to 15% FY14,’ the analysts said.

The retail distribution review poses risks, as Hargreaves continues to see no signs of increased competition or pricing pressure in its core Vantage business.

‘It points out that there have ‘always been competitors’ and some have ‘always been cheaper’, and yet [Hargreaves Lansdown] has built its business to a 30% market share of direct to consumer fund sales,’ the analysts said.

‘In contrast, we continue to believe that RDR represents a significant change in the market environment which will change investor behaviour from past historical trends.’