RBC Capital upgrades Transact owner IntegraFin to ‘outperform’

RBC Capital Markets upgraded Transact owner IntegraFin Holdings on Thursday to ‘outperform’ from ‘sector perform’ and lifted the price target to 330p from 280p.

The bank said that amid the shifting sands of the relatively new Consumer Duty regime, IntegraFin stands out as the best positioned UK platform.

"We see IHP as the business most compatible with the spirit of the Consumer Duty regulation that continues to be a source of uncertainty for the UK wealth sector," it said.

"This is evidenced by the group's customer-centric policy of passing on interest earned on client cash, as well as the long-term commitment to reducing client charges. As a result we see IHP as facing a fundamentally lower risk profile to earnings versus listed platform peers (Hargreaves Lansdown/ and AJ Bell) that have generated material revenues and profits from interest on client cash."

RBC said peers' earnings enhancements from this source are now baked fully into consensus estimates, while the reputation benefits to IHP are likely underappreciated, but should accrue over time, and underpin its confidence in future funds under direction growth prospects.

It noted that IntegraFin’s revenues are predominantly from the adviser platform - Transact - which it increasingly feels is preferable to the D2C market, where higher marketing expenditure is increasingly a feature.

RBC also said that a return to growth makes now a good time to buy.

"A complication within the IHP investment case over the last 18 months has been the contraction in EPS expected over FY22-FY24. However, with market focus likely to shift to forward earnings multiples for FY25 we believe this issue will diminish over 2024, as we expect EPS and DPS growth to restore.

"In our view, issues that have held back profit progression are now mostly behind the company - e.g. we expect Time4Advice will inflect from loss to profit by FY25.

"Moreover, guidance around group cost development has improved markedly and the impacts of the elevated tech spend have now been fully digested, meaning operational leverage and margin expansion should return after FY24. We expect an EPS CAGR of 9% over FY24-FY26."

Finally, the bank said the current valuation screens as attractive relative to peers.

"We believe IHP's superior income composition, lower regulatory risk and preferable market exposure merit a premium rating versus closest peer AJ Bell," it said.

It said the stock’s underperformance and de-rating year-to-date has been unwarranted, creating an attractive entry point.