An investment firm poised for a rebound

Rising interest rates and the resultant knock to fund flows have caused the market to back away from the company, formerly a star performer in the world of investment platforms. However, where there is fear there is also opportunity, and a closer look at Integrafin reveals a company with far firmer foundations than many suppose and an improving operational performance thrown into the deal as well.

An indication that the trading environment is improving came via a second-quarter update, which showed a return to decent net fund inflows. Between January and March, Integrafin achieved net inflows of £1.1bn, as the attraction of interest rates on cash started to moderate for financial advisers and the investors they advise. The consensus analyst estimate is that net flows will reach £2.4bn this year. This compares with £2.7bn in FY2023 and £4.4bn in 2022, and was described as "overly optimistic" by broker Peel Hunt, but suggests things are better than they were a few months ago.

If Integrafin can maintain the momentum, then its operational gearing could quickly convert this into upgraded earnings. Indeed, Peel Hunt analysts have upped their earnings per share (EPS) forecasts by 7 per cent for this year and 12 per cent for 2025. This would represent a return to form for Integrafin, which traditionally outperformed the general fund market competition before interest rate rises moderated net flows last year.

Alongside a rise in funds in the second quarter was an increase in the number of advisers using the Transact platform, which is crucial if the company is to expand its margins. At the end of the quarter, the business had 7,849 registered advisers, which is a 4 per cent rise year on year. Client numbers were essentially flat after account closures and the consolidation of smaller clients and advisers into single accounts.

Costs under control

To try to understand whether Integrafin has inherent advantages over much bigger peers such as Hargreaves Lansdown and AJ Bell, it is worth focusing on the differences between the businesses.

Although they offer a similar service, the target audiences of the larger companies differ in substance from Integrafin. Hargreaves Lansdown is a straight up direct-to-consumer business, while AJ Bell has a mixed model of advised customers and retail investors. The retail investor market is more volatile and inherently riskier but does offer consistently higher margins on transactions and deposited cash.

The retail platform is a very crowded market, though, with a whole range of specialist trading and investment options. Therefore, the need to spend big on marketing and advertising is intense – for those trying to catch up, at least. In 2023, Hargreaves Lansdown spent £20mn on marketing and advertising against total operating costs of £350mn. But for AJ Bell, a high-profile advertising campaign in 2023 caused what it calls “distribution costs” to rise by 73 per cent to £25.9mn, or around 20 per cent of the total operating costs.

Unhelpfully, Integrafin does not break out the cost of its marketing activity, but we can infer the scale by looking at the number of employees engaged in the marketing department. According to the last annual report, 65 employees out of 631, or just over 10 per cent, were engaged in marketing. This is the same percentage proportion as AJ Bell. However, the ramp-up in advertising spending at the latter is part of a push to boost its direct-to-consumer business. Integrafin has no such concerns.

Integrafin's tight business model is reflected by its operating margin of around 42 per cent, which is enviably roomy despite two years of demand pressure and rising staff costs.

Integrafin also runs into less regulatory bother than many other big market players. Unlike platforms such as Hargreaves Lansdown, Integrafin does not keep any of the interest earned on clients’ uninvested cash. Instead, it distributes all earned interest back to the investor. In fact, the company claims that it is paying the highest interest rate in the UK platform sector at the time of writing.

As well as keeping customers happy, the policy means that Integrafin is unlikely to be in the crosshairs of the Financial Conduct Authority's (FCA) investigation into how platforms treat client cash. Many rivals have only belatedly raised the interest rates they offer customers, and the threat of regulatory intervention continues to loom large.

Possible risks

The key downside of holding the company relates to how geared it is to the macroeconomic cycle. While higher interest rates have affected investment flows from all different types of investors, Integrafin’s impressive net flows from advisers in preceding years mean the shares have been on a particularly bumpy ride. It shares might experience greater volatility when the rate cycle turns, which is exactly what happened last year, with a disappointed market marking down the shares after getting used to consistent outperformance.

Specialisation can also be interpreted as a dangerous lack of diversification. Integrafin has a 100 per cent exposure to the UK financial advice market. While not as volatile as the direct retail market, advisers also ultimately bank on the financial health of the typical affluent investor. And the fact it doesn't generate free cash flow from earned interest on deposits means that the risk of operational gearing going into reverse is materially higher for Integrafin.

Despite these risks, however, the company is still cash flow positive, with little movement in its net cash position in the last results. The main variance is staff costs, and if inflation here starts to moderate this year then the pressure on earnings will ease from this part of operations as well.   

Integrafin's share price has halved since 2021. However, it still trades on a chunky forward price/earnings ratio of 18.6 times consensus forecasts. This makes it pricier than both AJ Bell and Hargreaves Lansdown. However, compared with its own track record it looks pretty reasonable, particularly if market conditions improve, and it has proved itself in the past.

If Integrafin can maintain steady market flows this year, there is no reason why the share price recovery we have seen since January cannot continue as interest rates start to ease.