Award-Winning Hub24

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Wealth platform Hub24 has marked a record March quarter of inflows but will see revenue margins fall from here.

-Hub24’s net inflows a record for a March quarter
-EQT migration slower than expected
-Cash levels and tiered fees to drag on margins

By Greg Peel

During the March quarter, wealth management platform operator Hub24 ((HUB)) achieved a number of business and operational highlights, Moelis informs. This included being awarded Best Overall Platform for the second year in a row, and several best-in-class awards in the Investment Trends Platform Competitive Analysis & Benchmarking survey.

Hub24 also ranked number one in 24 of the 53 key platform benchmarking subcategories.

This despite funds under administration (FUA) inflows for the quarter appearing at face value to fall well short of broker forecasts. However, there’s a catch.

Hub24 is in the process of migrating customers of Equity Trustees (EQT) onto its platform, with a value of some $4bn. The migration has proved a slower process than brokers expected, with only $800m migrating in the March quarter when forecasts were for up to $1.5bn. So the miss was simply a timing issue.

Management has informed the June quarter will see $1.7-3.0bn of further migrations and the September quarter will wrap up the remaining $0.2-1.3bn.

Excluding the EQT migration, core net inflows for the quarter totalled $2.7bn – a record for a March quarter — which was around about where broker forecasts lay. That’s an increase of 47% year on year.

Total funds under administration (FUA) was boosted by a 5.2% contribution from market movement in the quarter.

Improved market sentiment has led to an acceleration in net flows, Macquarie notes. The strong March quarter lays a platform for a good end to the year, although near-term pipeline commentary was more measured than the broker expected.

With large transitions adding more than $6bn in FY24-25 and market movements adding some $6.3bn in the nine months to March, Hub24 is currently tracking above the top-end of its FY25 FUA guidance of $92-100bn.

Revenue Drag

While brokers anticipate further positive flows in the June quarter, management has warned of lower revenue margins ahead.

Customer cash levels are understood to have stabilised at below 8% of FUA. While that’s below historical 8-12% ranges, Wilsons considers it important to reflect that with strong positive market movements – up 4.5% in the December quarter and 5.2% in March — cash, unlike equities, doesn’t increase in value, naturally leading to a dilutionary impact.

Wilsons expects the pooled cash interest revenue is still growing, albeit at a rate lower than FUA growth and thus weighing on reported second half platform margins and the rate of earnings margin expansion this year.

The other aspect is that of the platform’s tiered administration fee system, which reduces admin fees on market strength.

While not a new feature, management reminded investors stronger markets result in lower revenue margins due to the impact of admin fee tiering. This, combined with lower average cash balances, will result in reduced revenue margins.

Valuation

Even without further large transitions (such as EQT), Jarden believes Hub24 is on track to deliver above its $92-100bn platform FUA target by FY25, subject to normalised market returns.

While this underpins an earnings growth outlook in excess of 30% in FY25, even allowing for slightly lower admin fees, with the shares trading at a 37x FY25 PE relative to the broker’s forecasts for a 15% three year compound earnings growth rate thereafter, Jarden believes value upside in the short term is more moderate and retains a Neutral rating and an unchanged $41.75 target.

Moelis has slightly different numbers on its estimates, which suggest a 24% three-year earnings growth rate and an FY25 PE of 35x.

The investment thesis continues to be driven by a strong positioning as one of the leading specialist platform providers, Moelis notes, in an industry with favorable macro tailwinds. However, this broker believes at present these factors are well understood by the market and factored into valuations.

Moelis therefore maintains a Hold rating and target price of $41.50.

UBS notes underlying platform flows continue to improve and were ahead of the broker’s forecasts in a seasonally softer quarter. But UBS points to above-noted earnings headwinds in the second half in retaining Neutral and a target of $41.00.

Macquarie suggests various valuations for Hub24 remain elevated, but are looking less stretched with the recent market pullback, including yesterday’s market-wide thumping, which has seen the share price fall from $42.87 a week ago to $39.61 at the time of writing.

Macquarie notes Hub24 is trading at -14.5% price to earnings growth ratio discount to rival Netwealth Group ((NWL)) but retains Neutral with a target increased to $39.40 from $37.20. Macquarie has Underperform on Netwealth.

Ord Minnett’s assessment is that underlying net flow momentum is improving, which is positive for the platform's market share, revenue and earnings momentum. In that context, this broker expects Hub24 to continue to generate exceptional growth and is forecasting compound earnings growth of 26% over the next three years.

Ord Minnett believes Hub24 remains well placed to increase market share and returns to shareholders in the Australian wealth platforms market, and retains a Buy rating, with a target increase to $44.00 from $42.00.

Morgan Stanley this morning provided one of its “first glance” style assessments of Hub24’s quarter, suggesting simply it sees upside risk to June quarter net inflows based on higher seasonal flows and buoyant markets and hence Overweight retained with a $44.00 target.

With a healthy outlook and stability in pooled cash levels appearing, Wilsons’ forecasts see minimal changes, with a revised target of $44.69 continuing to underpin an Overweight call.

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