Rising Fee Compression And Disintermediation Will Erode Long-Term Value

Key Takeaways

• Fee and margin pressures from shifts toward lower-cost fund products and regulatory scrutiny threaten Allfunds' core revenue streams and profitability.
  
• Rising competition and disintermediation, along with slower-than-expected subscription business growth, increase risks to sustainable earnings and client retention.
  
• Allfunds' scalable platform, expanding global network, strong growth in alternatives, ongoing tech investment, and robust cash flow position it well for continued market leadership and profitability.

Catalysts

Operates as a B2B WealthTech company that connects fund houses and distributors in the United Kingdom and internationally.

• The rapid shift in investor preference towards passive and ultra-low-cost fund products is likely to further compress platform revenue margins, as Allfunds' average margin on new inflows is already trending down due to a mix shift into lower-fee fixed income and money market funds, threatening the sustainability of core commission and transaction revenue growth.
  
• Accelerating disintermediation in the wealth sector, as asset managers and distributors increasingly invest in direct-to-consumer or in-house digital distribution capabilities, is expected to reduce the role and fee pool available to third-party platforms like Allfunds, resulting in long-term revenue compression and increased client churn risk.
  
• Rising regulatory scrutiny on platform fees and the growing regulatory push for cost transparency across Europe may lower permissible charges or trigger further regulatory-driven fee compression, putting additional downward pressure on Allfunds' commission rates and potentially eroding net margins.
  
• Intensifying competition from both fintech startups and integrated market infrastructure providers such as Euroclear and Deutsche Börse-recently active in European platform M&A-could require Allfunds to cut distribution fees or ramp up spending on technology and marketing, leading to sustained net margin erosion and return dilution.
  
• The company's recurring subscription business, once expected to be a primary driver of high-margin, predictable growth, now faces delays, slower-than-expected adoption, and the need for restructuring, as product mix changes and extended sales cycles threaten to keep subscription revenue growth subdued and undermine long-term earnings and cash flow visibility.

Allfunds Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Allfunds Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Allfunds Group's revenue will grow by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -23.4% today to 26.4% in 3 years time.
• The bearish analysts expect earnings to reach €192.0 million (and earnings per share of €0.34) by about August 2028, up from €-156.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from -23.7x today. This future PE is greater than the current PE for the NL Capital Markets industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 1.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Allfunds Group Future Earnings Per Share Growth

Risks

• The ongoing digitalization of wealth management and increasing complexity in products are driving more distributors and fund managers to outsource operations, which directly supports Allfunds' scalable B2B platform model and could underpin strong revenue and earnings growth over the long-term.
  
• Allfunds continues to report robust annual growth in assets under administration, expanding both its distributor and fund house network, particularly in fast-growing regions like Asia, which positions the company for greater topline growth and increased market share.
  
• The rapid growth of Allfunds' Alternative Solutions business, evidenced by a 38% year-on-year increase in assets under administration for this segment, highlights the company's ability to capitalize on rising demand for private market and alternative funds, which are higher-margin and may support net margin expansion.
  
• Ongoing investments in proprietary technology, including forthcoming enhancements like the ETP platform and data analytics, are increasing switching costs for clients and enhancing operating leverage, which should support higher recurring revenues and sustained EBITDA margins.
  
• Allfunds' consistently strong cash generation and significant capital buffer-demonstrated by high free cash flow growth, a CET1 ratio of 36%, and substantial excess capital-provide the flexibility to fund further growth initiatives or shareholder returns, further supporting future earnings and share price resilience.

Valuation

• The assumed bearish price target for Allfunds Group is €5.8, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Allfunds Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €12.86, and the most bearish reporting a price target of just €5.8.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €727.8 million, earnings will come to €192.0 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of €6.09, the bearish analyst price target of €5.8 is 5.0% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.