Integrafin in the doldrums

Investment platform provider Integrafin (IHP) suffered a torrid half year as a combination of volatile market conditions and sagging investor confidence, along with forced price cuts to keep customers on board, led to a big fall in profitability, coupled with rising costs. There was a general sense that the company needs a pause to take stock of the situation. Investors reacted badly to the results, lopping 14 per cent from the share price in morning trading.

A relative minnow in a market segment dominated by the likes of AJ Bell (AJB) and Hargreaves Lansdown (HL.), Integrafin had found its niche supplying platform services to networks of advisors, who deal with client acquisition and management. The model has proved successful in that Integrafin remains a relatively low-cost operation, without the need for the sort of marketing spend that characterises the platform giants who target consumers directly.

The margin issue does not seem to relate to wage inflation – average payroll costs rose by 26 per cent and were broadly in line with a headcount rise of 24 per cent – rather with the need to cut prices to maintain market share and to make provision for higher tax burdens incurred by its customers during frothier market periods; this charge could reverse as equity gains are pared back. Even so, RBC analysts calculate that the company’s underlying expenses rose by 28 per cent to £32.9mn.

The action on prices may have salvaged something from the situation, as both active investors and advisor numbers rose by 9 per cent and 5 per cent, respectively, as the half faded out. However, the clear implication is that margin progression has all but ceased, despite higher fund inflows. This is a problem for a business, and a sector more generally, that needs to eke out every ounce of profit from the fees it charges, as the overall cost base is largely fixed and capital spending on IT and platform products is an ongoing expense.

Investors are currently in an unforgiving mood at any sign of underperformance in the current climate. Peel Hunt’s forecasts give a price/earnings ratio of 19 – with such extreme volatility ahead, it is difficult to argue that this represents a value proposition. Integrafin will continue to invest in its platform, but it seems likely that its fortunes will be determined by forces beyond its control. Hold.

Last IC View: Hold, 304p, 16 Dec 2021