Description

This is going to be a very simple idea.

Integrafin is the best positioned financial advisor custody platforms in the UK. The business is similar to Schwab here in the US. They allow advisors to custody client assets, manage trading, reporting, taxes, etc. The revenue model is largely through a tiered take rate of AUM. Total take rate is about 25bps today. They do not make money via trading and float / margin lending. Therefore, total revenue yields are very predictable.

The B2B asset management business in the UK has grown much faster than the B2B market in recent years. Key contributors are:

1. Growing independent financial advisor population

2. Assets / clients breaking away from banks and insurance companies which own the vast majority of invested capital in the UK

3. Govt mandating defined contribution pensions in the last decade

4. Some DB to DC conversions by employers

Weirdly though, the B2B market is very fragmented. Integrafin only has a low teens market share. There are something like 16 platforms of reasonable scale. The biggest is Aegon. But you also have AJ Bell, Quilters, Old Mutual, Nucleus, Funds Network, Standard Life, James Hay, and a bunch more you've probably never heard of.

Most of these platforms are legacy technology. Most in fact outsource their tech stack to a third party called FNZ (and also Bravura to a lesser degree). 

Integrafin is one of the only company to completely own their tech stack. This allows a much better customer experience as well as allows them a LT cost advantage. Integrafin consistently has the best NPS scores in the industry. Their product is the best / most full featured / easiest to use by advisors.

They also have the reputation of offering best in class customer service.

Clients are no surprise extremely sticky (96% gross retention). 

Integrafin has the best organic flows in the industry. They have been the #1 flow getter for like 6 years running, despite their relatively small market share.

Bottom line: Integrafin has been a secular share winner and that will probably continue. Net flows have been in the HSD to low teens, and total FUD has been increasing mid teens.

On the negative side, there's constant deflation in their take rate as they have to give some benefits of scale back to clients. Over the last 5-7 years, this has been a consistent 4% headwind to revenues. That said, because there's huge natural operating leverage to the business model, over this time frame margins have largely moved up. In recent years adj EBIT stabilized in the low 50s. Organic EBIT has CAGRed in the mid-teens.

The stock is down 50% YTD and the stock trades for 17x NTM, which is the lowest multiple the stock has ever traded for. Reasons are following:

1. Margins are down this year. Firstly, revenue yields continue to decline as normal, but cost base is up much more than expected due to salary inflation, a small acquisition last year (Time4Advice), and mgmt is guiding to accelerated hiring for the remainder of 2022 to further develop the technology platform. In H1 2022, EBIT was only up 4% YOY on top of 14% FUD increase. It looks like H2 2022 will see an EBIT decline. Quite possibly 2023 will be down over 2022.

2. FUD has pressures from market conditions which is a double whammy

All that is definitely not good, but I believe these are transitory issues. I think there's a good chance they'll get through these cost issues over the next 12 months (after all, a lot of the investment is really discretionary...) I believe everyone in the industry is getting hit by cost issues, and my guess is that we'll see (at minimum) a slowdown in revenue yield compression if it persists, which will offset some of the pressure. Of course, if inflation has indeed peaked, things will get easier for them.

Meanwhile, you have a very high quality company, very capital light, 4% dividend yield, secular share gainer, nice tailwinds, trading for half the multiple of a year ago. I'd take my chances.

You lose if the margin pressures are way more persistent than I gave credit for here. Or if the market crashes and their FUD declines precipitously.

Catalyst

Margins stabilizing.