For some time, investment platforms have been among the UK's most highly-valued listed companies. Given the dearth of genuine equity growth stories out there, this is unsurprising. There’s no denying the attraction: platforms are capital-light businesses with strong cash flows, great margins, and an ever-growing demand from clients and financial advisers for a single place to manage portfolios. Under this is a huge structural driver: an ageing population pushed to handle their own finances. In this field, we believe mid-sized player Nucleus Financial (NUC) has flown below the radar, despite its wide financial adviser network, asset growth, client numbers and well-regarded platform. Trading at a big discount to peers, we spy a rare decently-priced growth stock among 2020’s rubble.
Excellent long-term trends
Good AuA growth track record
Discount to peers
Customer and adviser growth
Less profitable than peers
Suspended dividend
Nucleus joined the bevvy of sector IPOs in 2018, ahead of the multi-channel platform AJ Bell (AJB), and several months after closest peer IntegraFin (IHP) – whose Transact software is used by more than 6,000 advisers managing £39.7bn of funds on behalf of 187,000 investor clients.
By comparison, Edinburgh-headquartered Nucleus looks after 1,428 active financial advisers serving a 100,000-strong customer base. Client funds averaged £15.4bn in the first six months of 2020, and eventually hit £15.8bn at the end of June, just shy of Berenberg’s forecast for the end of the year. This translates to profitable scale: in 2019, when Nucleus’ assets under administration (AuA) averaged £15.2bn, it made a pre-tax profit of £7m. Despite this, based on consensus forecasts, IntegraFin shares trade at almost twice the earnings multiple commanded by Nucleus.
Four reasons explain why Nucleus’ valuation is so far adrift of its larger rival: slower net flows; a suspended dividend; lower profitability; and a less popular platform. Yet none spell disaster. For one, net flows were 2.7 per cent of opening AuA in the first half of 2020, while the 13.1 per cent rise in total funds in the second quarter was well ahead of the rise in the FTSE All-Share.
Second, investors should look past April’s decision to suspend the 2019 final dividend, which was made amid extreme uncertainty caused by lockdown and which we think could be reinstated when half-year figures are published on 8 September, given the strong net cash position at the start of this year and high historic payout ratio.
Third, while Nucleus’ income is supported by good operating margins, its higher relative fixed cost base means its pre-tax profits are about a seventh those of IntegraFin. Although it needs to invest in its technology and marketing, these margins should grow if the average annual AuA growth rate of 15 per cent from 2015 to 2019 is maintained in future years.
| Nucleus Financial (NUC) | |||||
| ORD PRICE: | 130p | MARKET VALUE: | £99m | ||
| TOUCH: | 128-132p | 12-MONTH HIGH: | 182p | LOW: | 100p |
| FORWARD DIVIDEND YIELD: | 4.6% | FORWARD PE RATIO: | 14 | ||
| NET ASSET VALUE: | 26.0p | NET CASH: | £14.4m* | ||
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
| 2017 | 39.4 | 5.10 | 6.21 | nil |
| 2018 | 43.2 | 5.70 | 8.24 | 5.0 |
| 2019 | 45.3 | 7.00 | 8.08 | 1.5 |
| 2020** | 46.0 | 6.40 | 7.61 | 5.0 |
| 2021** | 48.1 | 8.10 | 9.53 | 6.0 |
| % change | +5 | +27 | +25 | +20 |
| NMS: | ||||
| BETA: | 0.6 | |||
| *Includes lease liabilities of £4.2m | ||||
| **Shore Capital forecasts, adjusted PTP and EPS figures | ||||
