IntegraFin: a platform for growth

That might not be so easy, with IntegraFin’s cash-adjusted price/earnings (PE) ratio of 27 times based on broker Peel Hunt’s 2020 forecasts. The shares are also up 43 per cent since hitting a December low. However, we think the considerable growth in the group’s market warrants a long-term view.

But let's begin with a look back at the track record. IntegraFin was the first company to introduce the UK market to the wrap platform, when it launched Transact in 2000. Many readers will be familiar with these platforms, which allow investors to hold a variety of financial assets, including funds, equities and cash across a range of tax-efficient wrappers, and in one centralised portal. While some investors will choose to manage their portfolios themselves, Transact is marketed to independent financial advisers as an easily navigable and transparent system for handling the often complicated job of wealth management.

The platform clearly has its admirers. Independent surveys rank Transact as the clear favourite among UK advisers for each of the past nine years. Even stronger proof of advisers’ preference has been consistent net inflows, and a growth in assets under management every year since the platform launched, regardless of the direction of equity markets. In fact, when the FTSE All-Share dropped a fifth between 2007 and 2009, the group’s funds under direction leapt 45 per cent. The company floated at 196p just over a year ago, with all equity sold coming from existing shareholders, and especially founder Michael Howard, who sold a 19.2 per cent stake but retained a 13.3 per cent holding.

As of 31 March 2019, IntegraFin’s funds under direction stood at £34.4bn, which equates to a compound annual growth rate of 18.3 per cent over the past five-and-a-half years. During that time, revenue margins have declined through a mixture of rising competition and passing the benefits of scale on to more than 3,000 financial advice firms who use the platform. But both this, and rising costs, have been outstripped by the increase in assets, which has created a strong operational gearing effect.

This is powered by the group’s revenue stream, which is essentially a percentage of all assets listed on the Transact platform. In the year to September 2018, this came to 0.3 per cent of average fee-generating funds. That also helps to explain the recent rally in the stock; as equity markets have pushed higher, so have investors’ expectations of revenue growth. Of course, the capacity for a 'melt-up' moment in global stock prices is good for near-term earnings. But there's more to IntegraFin’s allure than market moves.

Over the short term, both IntegraFin shares and indices will exhibit volatility. The MSCI World Index is up 6 per cent in the past year, but was down 13 per cent as recently as December. The months ahead could prove just as volatile, as chief executive Ian Taylor recently flagged.

But the crux of Transact’s growth story is its stickiness with advisers, and there’s an argument to look beyond market moves as a driver of earnings. Moreover, the strong trend towards self-directed investing, increasingly online, and often in tandem with a financial adviser to navigate the complexities of wealth and tax management, means demand for Transact is only likely to increase. That would be the case even if the intellectual property supporting this growth – the Transact wrap platform – wasn’t the recognised market leader.

And although the fragmented market for platform services is either consolidating or highly competitive, Peel Hunt thinks IntegraFin’s current shares barely scratches the surface. Excluding banks and financial institutions, the broker estimates that half of the UK’s 26,000 registered financial advisers – a figure that continues to grow – is a potential customer compared with the current 3,000-strong client roster.