In 2021 and 2022, Hargreaves earned £50m in each year on client cash, and the analysts estimated the income will grow to around £270m for the 2024 financial year.
Jefferies has restated its ‘Buy’ rating for Hargreaves Lansdown, a positive call amid a run of negative ratings on the DIY investment platform.
Jefferies analysts' forecast that the interest income earned on client cash will help fund the platform's investment programme.
They noted that HL was unlikely to be one of the platforms involved in the ‘double dipping' issue highlighted by the Financial Conduct Authority last year - where platforms charged platforms fees alongside taking interest on client cash.
As a result, analysts Julian Roberts, Tom Mills, Laura Gris Trillo and Fangfei Li said they did not expect any changes to HL's guidance for interest margins on client cash.
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In 2021 and 2022, Hargreaves earned £50m in each year on client cash, and the analysts estimated the income will grow to around £270m for the 2024 financial year.
The analyst team said the income forecast for 2024 "will almost cover the whole four-year investment budget, including dual-running of some systems".
This positive rating came amid a testing time for the firm, both on a performance basis and buyers' sentiment against it.
Last week (2 January) Wall Street hedge fund Point72 Asset Management became the latest wealth manager to take out a short position on HL.
The company is also facing some demographic headwinds, with richer customers either leaving the platform or entering drawdown, Jefferies analysts commented.
The analysts argued this would explain how the assets under administration (AUA) rate has been below the client retention rate, as people around the age of 60 are more likely to turn to a financial adviser and start drawing down as they approach state retirement age.
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However, the four analysts said they expect the drawdown and/or departure headwinds to start subsiding by 2027.
They also shared faith in the recent appointment of CEO Dan Olley, suggesting he should focus on improving retention and defending HL's platform fee.
As a result, the Jefferies team has applied a 10% discount rate in its cash flow modelling and a 4% terminal growth rate for HL.
They added the current price is around 10.5x Jefferies' adjusted earnings per share forecast for 2024, "which seems low for a stock with long-term structural growth drivers, [and that] has maintained 40%+ market share for half a decade and has a 50%+ operating margin".
