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The Hargreaves Lansdown share price is hit by Brexit. Here’s what I’d do

Alan Oscroft
EU and UK flag on broken wall

Hargreaves Lansdown (LSE: HL) and OnTheMarket (LSE: OMTP) both brought us updates Thursday, and both could suffer from a no-deal Brexit.

In the case of OnTheMarket, the online property portal provider revealed a 14% rise in first-half revenue to £8m, though it’s a long way from profit territory just yet. A rise in administrative expenses of 23% to £14.8m, “primarily as a result of the group’s investment in its sales and IT teams,” led to an adjusted operating loss of £6.7m.

The bottom line is a loss per share of 11.16p (from a loss of 9.57p at the same stage last year), and the company reached 31 July with £8.8m in cash on its books, from £15.7m six months previously.

Record-breaking

CEO Ian Springett said: “We have delivered another set of record-breaking traffic and leads results for our estate and letting agent shareholders and customers,” and I do think the company is doing pretty well at this stage. So why do I feel so twitchy about it?

One obvious thing is the collapse of the Purplebricks share price, after that company greatly overstretched itself. But even without that, we’re looking at a competitive marketplace with Rightmove and Zoopla in the same space. And, as far as I can see, there’s little in the way of differentiation between them. Each can, I’m sure, point to their own unique features, but to most people it’s just buying and selling houses.

We’re also looking at a company that’s not yet profitable, with probably around six months of cash left at current burn rates, and facing an uncertain Brexit that could hammer the property sales business. It’s not for me.

Brexit uncertainty

Hargreaves Lansdown shares, meanwhile, dipped 2% after its latest quarterly trading update spoke of “new business in the period being impacted by weak investor sentiment arising from continuing Brexit and political uncertainty in the UK and wider global macro issues such as trade tariffs.”

Still, the investment platform operator was able to report net new business of £1.7bn in the three months to 30 September, with new client numbers reaching 35,000. Assets under management grew 3% in the quarter to £101.8bn, with modestly rising markets contributing £0.8bn of upwards movement. Net revenue for the period increased by 6% to £128.1m.

Even with the downward pressure of Brexit, that still looks like a pretty decent performance to me. But the impact of current Brexit fears might be nothing compared to the actual effect of the departure itself, if we’re saddled with an economy-crushing no-deal expulsion.

Buy the shares?

But what of Hargreaves Lansdown shares now? Despite having no argument against the quality of the company, which seems well-proven, I’ve always been nervous over the market’s valuation of the stock. I’d expect a premium valuation over the Footsie average, but the P/E multiples in excess of 30 that we’ve been seeing in recent years turns me away.

I see too much past growth in today’s share price, and on that kind of valuation I see very little downside safety margin — especially if we’re in for a few tough economic years.

For me, the shares are just too expensive for a company, albeit a good one, offering me dividend yields of only around 2.5%.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019