Will this financial services company outperform Hargreaves Lansdown plc?

Hargreaves Lansdown head office

Private equity investment company SVG Capital(LSE: SVI) has today released strong results for the first half of its financial year. They provide clues as to whether it could prove to be a better buy than financial services sector peer Hargreaves Lansdown(LSE: HL).

SVG's NAV per share has risen by 12% in the last six months and this takes its increase for the last year to 21%. This was boosted by the performance of its investment portfolio, with it recording a total return of 13% during the six-month period. Its core investment portfolio, which represents over 50% of the portfolio, performed well and the overall appeal of the business remains strong, as evidenced by the unsolicited final offer from HarbourVest Bidco.

The offer is viewed as too low by the board of SVG, which has advised its shareholders to wait for other offers. In fact, SVG states in today's update that it has received approaches from a number of credible parties and this could lead to a higher offer than that which is currently on the table.

SVG continues to have a strong balance sheet and good coverage of its uncalled commitments. It trades at a substantial discount to its NAV, with SVG having a price-to-book (P/B) ratio of just 0.93. This indicates that its shares could rise significantly over the long run - especially since they have a price-to-earnings (P/E) ratio of only 9.5.

Overvalued shares?

This valuation compares favourably to that of sector peer Hargreaves Lansdown. It trades on a P/E ratio of 34.2 and this indicates that its shares are overvalued. The company offers a high degree of stability and has been able to increase its earnings in four of the last five years. This compares favourably with SVG's performance over the same timeframe. SVG was lossmaking in two of the last five years and its profitability has been highly volatile.

However, with Hargreaves Lansdown's earnings due to rise by just 6% in the current financial year, it's  difficult to justify the current rating. That's especially the case when SVG has a P/E ratio of just over a quarter of Hargreaves Lansdown's.

SVG also has clear bid potential. Although there's no guarantee that further bids will be forthcoming, the strength of its business model and the performance of its portfolio indicate that bids are likely. That's particularly true because of SVG's management's confidence in recommending a rejection of the current bid from HarbourVest Bidco.

In comparison, Hargreaves Lansdown is an unlikely bid target due to its high valuation and UK focus at a time when Brexit is a real concern for investors, while SVG has exposure to a number of funds that operate across the globe. This provides it with greater diversification than Hargreaves Lansdown. When combined with its lower valuation and bid potential, this makes it a superior buy than its financial services sector peer.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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