IntegraFin at a crossroads

Asked to name the most successful listed UK investment platform, many stock-pickers might point to the retail-facing Hargreaves Lansdown (HL.) or its cheaper peer, AJ Bell (AJB). Despite its lower profile, IntegraFin (IHP) – whose Transact software is used by more than 6,000 financial advisers managing £41.1bn of client funds – should be seen as both a strong contender and one of the market’s most profitable companies.

Results for the year to September again spell out why. During the period, the total retail-advised platform market grew by 6 per cent – as measured by total funds under direction – highlighting the huge sector tailwinds even in a year of huge volatility. Despite the ructions and a second-half dip in inflows across the sector, IntegraFin’s own funds grew by 9 per cent, in another demonstration of Transact’s cachet.

Ten weeks after the period’s end, the story has changed. On 2 December, the group confirmed it was reviewing the “strategic and financial merits of a possible acquisition” of smaller listed peer Nucleus Financial (NUC). The Edinburgh-based group, currently valued at £138m but with a financial adviser client base that serves more than 100,000 investors, has also received an expression of interest from rival James Hay Partnership, backed by private equity group Epiris.

Consensus forecasts are for earnings per share of 14.3p for the 12 months to September 2021, and 16.2p in FY2022. However, Numis analyst James Hamilton has withdrawn his forecasts, arguing the outcome of the potential Nucleus deal is “fundamental to determining the fair value of the company”.

His counterpart at finnCap, Nik Lysiuk, echoed the sentiment, adding that a potential rival bid from private equity “should tell you all you need to know about where future value lies in the savings and investments market”. Previously, the so-called smart money had been focused on investments in advisers themselves, rather than platforms.

Longer term, there is little reason to doubt future growth; on balance, adviser-led fund flows are also probably a stickier source of business. Yet that tells us little about the immediate potential hit to IntegraFin’s earnings from the deal, or the difficulties of replicating fund flow momentum in an environment characterised by low interest rates and inflation, and high asset prices everywhere.

Investors might also question whether swallowing smaller rivals to extend client and adviser reach is preferable to allowing operational gearing to work its magic. Hold.

Last IC View: Hold, 546p, 29 Jul 2020