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Credit Suisse downgrades 'great business' Hargreaves Lansdown
Hargreaves Lansdown is a great business but its valuation cannot be justified, Credit Suisse analysts said as they cut their rating on the savings, pensions and investment group.
Hargreaves offers the prospect of healthy growth over the next few years but the risk of disappointment is too great, the analysts, led by Tom Mills, said. As a result they downgraded the company to 'underperform' from 'neutral' despite increasing their target price to 1,730p from 1,124p.
Trading on 29 times Credit Suisse's earnings estimate for 2019, Hargreaves' valuation is simply too high despite being a "great business", the analysts said.
After the shares rose 50% from early July the valuation assumes continued strong asset growth, steadily rising markets and relatively stable fee margins. At this point in the cycle the risk to one of these factors is high, Credit Suisse said.
In addition, Hargreaves faces three significant risks to its business. First, the Financial Conduct Authority's study of asset managers could be tougher than the market expects. Second, US tracker fund giant Vanguard's UK launch could put pressure on fee margins. And third, Hargreaves' new active savings product could attract higher capital requirements, limiting its ability to pay out cash to investors.
The analysts said: "We believe Hargreaves' current valuation more than reflects the opportunity of its medium-term growth initiatives, whilst failing to take account of potential downside risks, including regulatory and competitive pressures."
Credit Suisse's downgrade of Hargreaves was part of a wider review of asset managers and exchanges. Their top picks among asset managers were Schroders and Man Group and from exchanges they favoured London Stock Exchange and Euronext.