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Questor: is little-known IntegraFin poised to be the next Hargreaves Lansdown?
Questor share tip: shares in Hargreaves have made big profits for readers. IntegraFin is similar – but trades at a much lower valuation
One of Questor’s best picks has been Hargreaves Lansdown, the “investment shop”: its shares have risen by 50pc since we tipped them almost two years ago. Today’s stock is similar but rather less well known, which may account for its lower valuation.
That stock is IntegraFin, which listed earlier this year. It owns a business called Transact, which offers to financial advisers what Hargreaves offers to “DIY” investors: an online shop through which they can set up and manage Isas, pensions and investment accounts.
Both companies are supported by powerful trends in the savings market and by favourable economics in their chosen business model.
As employers step back from providing generous pension schemes, individuals are being forced to save directly. If they want to do so via the stock market, they will almost always use an investment shop such as Hargreaves (if they don’t have an adviser) or IntegraFin’s Transact (if they do).
These companies can be expected to administer larger and larger sums as more customers decide to save for the future and as their investment pots grow. Investment shops generally charge each customer a percentage of the amount saved, so their turnover rises as clients’ Isas and pensions grow more valuable.
“The savings backdrop is very attractive for these firms but the business model adopted by Hargreaves and IntegraFin makes the most of the opportunity,” said Blake Hutchins, manager of the Investec UK Equity Income fund, who has stakes in both.
“Investment shops can either use their own technology or outsource it; both have chosen the former. This makes a huge difference to the benefit they derive from growth in their customers’ portfolios.
“Developing your own technology is almost a fixed cost, so each additional pound of revenue is largely converted into profits. If you outsource your technology, however, you will tend to pay for it as a percentage of the amount involved, so your costs rise in line with the total sum you administer and much of the benefit of growth in customers’ assets is lost.”
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Having your own technology also avoids problems that often arise when suppliers are changed and allows new products, such as Lifetime Isas, to be offered more quickly. Hutchins added: “Hargreaves, IntegraFin and similar firms are software companies at heart, so they require little capital and once they reach a certain scale become very cash generative. They can afford to fund growth and return profits to shareholders via dividends at the same time.
“IntegraFin allocates its capital sensibly. Ian Taylor, the founder, is still there – he won’t do anything silly, such as embarking on an acquisition spree.”
The stock is trading at about 24 times expected earnings for the year to September 2019, which is considerably less than Hargreaves’ figure of about 32 times. While even a multiple of 24 may not sound cheap, Hutchins said you should always bear in mind a business’s quality and growth prospects when you look at valuation.
“These are businesses that could double profits in a few years,” he said. “Then your multiple becomes 12 and suddenly your figure of 24 looks deceptive.”
Questor says: buy
Ticker: IHP
Share price at close: 296.4p
New listing: AJ Bell
Many of IntegraFin’s strengths are shared by AJ Bell, which is due to list on the main market next week.
AJ Bell runs investments for “DIY” savers but also competes with IntegraFin for financial advisers’ business. It too can be expected to increase the amount of money it looks after as more and more people are forced to save for retirement, Hutchins said. Crucially, like IntegraFin, it owns most of its technology so should be able to turn much of any increase in fee income into higher profits.
The company has said it will price its shares at 154p-166p, which would equate to an earnings multiple of between the low and high 20s. In light of the discussion above, this does not seem excessive. Only AJ Bell customers can take part in the flotation and they must apply by 5pm today. Questor suggests that they take up the opportunity.
- Questor archive: telegraph.co.uk/questor