Hargreaves Lansdown hit so many negatives in the year to the end of June that it is a wonder the profits held up as well as they did. As it was, an underlying increase of 15 per cent translated into a reported reduction, at the pre-tax level, of 5 per cent to £199 million.
The good news for investors is that most of the negatives are one-offs and the company should return to profit growth this year. The better news is that Hargreaves is positioned to take advantage of a market that can only continue to grow.
Of the one-offs, the need to cut charges to clients cost about £18.5 million. The general direction of the market is for these to fall, so it is hard to unpick how much of the reduction is the need to reposition the company in the aftermath of the Retail Distribution Review, which changed the way clients are charged. Lower income on cash held on behalf of clients took off another £17 million and there was a £3.5 million loss because of changes to how clients are charged for foreign exchange conversions. Finally, the charge levied by the Financial Services Compensation Scheme was up by £3.6 million. As a result of all this, operating margins fell four percentage points to 67.3 per cent.
The positives are that the soggy markets, with the FTSE all-share index a touch lower year-on-year, do not seem to have dented investor confidence. This is no surprise — changes to pensions legislation should drive people in the long term to the services that Hargreaves provides, whether self-investment in equities or buying its range of funds. Plus the company does well out of market volatility, which drives business towards stockbroking.
The picture since the year-end will be a mixed one, then. As it is, total funds under management grew by £8.3 billion to £55.2 billion, split about three quarters to a quarter fresh funds in and positive market movements — about half investors’ cash is outside the UK, some of the rest in markets that outperformed the latter.
The shares have come back from nearly £13 in May. Up 78p at £11.93p, they sell on 32 times earnings. That may look high, but the shares have been much higher and remain attractive for the long-term growth prospects.
Revenue £294m
Dividends 33p
67.3% Operating margin on net revenue
MY ADVICE Buy long term
WHY Rating may look sky high, but the shares have been considerably dearer and one-offs are largely in the past, allowing focus on growth
The size of the Virgin Money float last November had to be increased because of the strength of demand for what must be the strongest brand among the new challenger banks, so it is no surprise that the reaction to the decision by Wilbur Ross, its biggest investor, to sell nearly half his holding should have been muted.
Mr Ross, an investor for five years, can sell his remaining 12 per cent by Christmas, should he so wish. Virgin shares, floated at 283p, have done little this summer, given the surcharge on bank profits and the markets generally, so the 405p a share achieved by the bookbuilding is not too far from the amount he saw when last he sold in April.
In the event, Virgin shares fell 19½p to 404p. There seems every reason for Mr Ross, who originally backed the purchase of the profitable bits of Northern Rock in 2011, to sell again, having seen a good turn on his investment, which will further improve liquidity in the stock. Investors in other challenger banks are also likely to sell in coming months — good news for would-be investors. I have my doubts about the challengers, but Virgin looks the best placed and that demand should support the shares.
Price of latest share sale 405p
MY ADVICE Buy long term
WHY Virgin seems the best placed of challenger banks
Whoever it was who failed to put up enough cash to satisfy the board of Monitise when the payment software business was put up for sale this year must be thanking their lucky stars.
Not only has Elizabeth Buse, the chief executive, walked, for what one must assume are genuine personal reasons, but the figures for the year to June 30 are truly dire. The shares stood at about 80p at the start of last year. They crashed 52 per cent to a barely relevant 2¾p yesterday.
This was once one of the great UK technology hopes, relentlessly talked up by Alastair Lukies, the founder. Then it became one of those businesses that was definitely, no doubt, going to be taken out by one of its shareholders among the banks — probably Visa.
Then Visa and its European affiliate said, brutally, that not only would no bid be forthcoming but also that their holdings would be sold and they would be developing their own technology. Now Monitise is a penny share, stuck in the middle of moving its business model from a licence basis to the cloud and forced to take £124.6 million of write-offs from unwanted technology and unattractive contracts. Cash is draining out and, while the company has deferred the long-awaited break-even point to the end of the next financial year, industry analysts have mixed views on whether this can happen.
About the only way forward would be for someone to step up and finally put Monitise out of its misery. Optimists might consider a purchase out of option money. I certainly wouldn’t, though.
Size of write-offs £124.6m
MY ADVICE Avoid
WHY Little reason to buy, even as a penny share
And finally…
Shares in Genel Energy have been climbing again, reflecting the imminence of the first payment by the authorities in Kurdish Iraq for production at its assets there. Those payments have been confirmed this week, $24.5 million for its share of the Taq Taq well and $8 million for Tawke. This is a mere drop given the $378 million Genel was owed at the end of June, but the assumption is that small regular payments will come through and the rest of the backlog will be cleared next year, when production picks up further.
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