Here is an odd paradox. Surveys of its clients by Hargreaves Lansdown, the biggest online share dealing service, suggest that confidence among investors fell sharply after the referendum. The broker had a 51 per cent rise in the number of deals it handled in the first half to December 31. This would imply that investors were getting their money out of the stock market.
Yet the amount of funds under management at Hargreaves continued to rise, up by 13 per cent over the six months. There was a noticeable slowdown in the first quarter of 22 per cent, but this was countered by a 10 per cent rise in the second.
This rise in funds under management in the latest half reflected a net inflow of £2.34 billion to add to a £6 billion gain from positive stock markets. Plainly, the answer is that people were saying one thing and doing another, taking advantage of some of the bizarre share prices on offer immediately after the Brexit vote and then coming in strongly again on the Trump election victory.
Hargreaves is a well-run business that can hardly fail to benefit from the long-term trend towards self-investment. Margins can only improve as increasing amounts of business are driven through the company, mainly on its Vantage platform that accounts for three quarters of revenues. That scaleability of the business, and control over costs, explains why pre-tax profits were up by 21 per cent to £131 million on revenues up 16 per cent.
The decision to delay the new savings product to the autumn looks a sensible one. This will contribute little financially over the first two years and, with no competitors in that market, it is better to get it right first time than rush things.
Hargreaves Lansdown’s interim figures were ahead of most analysts’ expectations and another indication of strong growth from the business. The shares continue to trade on a high multiple, which presupposes that this growth will continue.
Off 22p at £13.64 yesterday amid disappointment over that savings platform, they sell on almost 35 times earnings for this year. The trick with the shares is to buy on weakness; they are trending towards the top of their range.
My advice Avoid
Why The company has a strong position in a market that can only continue to grow, but the shares look fully valued for now
Redrow
It is extraordinary to think that, in the immediate aftermath of the referendum, shares in Redrow fell to well below £3. As was said at the time, that valuation made no sense unless you expected some terrible catastrophe in the housing market.
The shares rose 18p to 470½p after halfway figures indicated that any such catastrophe was still a long way off yet. Completions were up by 13 per cent and the order book by 35 per cent. Redrow is confident enough to put some punchy forecasts into the market for its 2018-2019 financial year, of turnover growing to £1.9 billion and operating margins holding at 19.5 per cent. The land bank is full enough to support that growth.
One of the reasons that Redrow shares were sold so heavily in the summer is that they do not supply the high dividend yield of others in the sector, with the company preferring to concentrate on growth. The interim dividend is up by 50 per cent to 6p and cover is intended to shrink so as to offer a decent income in future.
That seems to be the best of both worlds and the shares, on seven times this year’s earnings, look like good value.
My advice Buy
Why Redrow continues to go from strength to strength
Sophos Group
Sophos has carried out three acquisitions since it floated in mid-2015, but the latest requires the market to take a fair amount on trust.
The software company makes products that keep medium-sized businesses safe from cyberattack; this is an industry that is consolidating rapidly, but there are no huge synergies from acquisitions. Sophos is paying $100 million and a potential further $20 million for Invincea, a Virginia-based software company, which will extend its range from products that aim to prevent malware and the like from entering clients’ systems to patrolling these to find intruders. Neither Sophos nor Invincea makes a meaningful profit, although the former has strong free cashflow that funds a minimal dividend.
This means normal metrics for either Sophos or its target cannot be applied. On one measure, the relationship between annual billings and the businesses’ worth, the price being paid is three to four times Sophos’s worth. The company can point to an earlier deal on a similar multiple that worked and boosted revenues accordingly. The third-quarter figures show the numbers moving in the right direction, with a 16 per cent rise in billings and 20 per cent growth in the Americas, where Invincea is strong serving government, healthcare and financial services. Sophos shares, up 10¼p at 280p, are ahead of the 225p at flotation after some earlier weakness. This is not one on which a firm view can be taken, but there seems no obvious reason to buy now.
My advice Avoid
Why Price recovery suggests progress may be limited
And finally . . .
A brave call from Peter Lenardos, at RBC Capital Markets, who does not think Aberdeen Asset Management will have to cut its dividend. This column has suggested that this is all that is holding Aberdeen shares in place after a decline in assets under management, but there are fears that deteriorations in emerging markets values may mean earnings fall too far to allow the payment. As Mr Lenardos points out, there is the option that the asset manager may attract an offer or embark on some earnings-accretive M&A itself.
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