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Containing Costs The Challenge For Hub24

Australia | Mar 02 2023

This story features HUB24 LIMITED, and other companies. For more info SHARE ANALYSIS: HUB

Specialist platform operator Hub24 continues to grow funds under administration and market share, but it's the growth in costs that is now the key challenge.

-Hub24 platform FUA surges 12% to $55.8bn
-Specialist platforms continue to increase market share in Australia
-Rise in costs a potential cause for concern

By Nicki Bourlioufas

Margins expand as interest rates rise

As last week’s interim report revealed Hub24’s ((HUB)) platform funds under administration (FUA) surged by 12% to $55.8bn over the first half, analysts are in unison about positive inflows likely to continue in the months ahead.

But with higher interest rates boosting cash reserves and helping margins, a jump in costs is seen as a worry for some.

UBS formulated it as follows:

“At the Group level, very strong revenue growth was matched by very high cost growth”.

UBS has a Buy rating for the stock alongside a $31.00 price target, but the broker will be scrutinising the company’s costs, including its labour bill after a jump in headcount by 36 full time equivalent positions to 522 (+7.4% growth).

Overall, brokers liked the strong growth in FUA. Platform net inflows for the first half rose 14% to $5.8bn, while total FUA grew by 7% to $73.0bn.

Hub24 is one of Australia’s fastest growing wealth management platform businesses in Australia, primarily focused on financial advisors.

Net profit after tax (NPAT) hit $26.6m, up 87% on 1H FY22. The company is enjoying the fastest growth rate as a percentage of FUA based on annual net inflows; its market share has increased to 5.7% from 4.6% as at September 2021.

Earnings before interest, taxes, depreciation, and amortisation (EBITDA) jumped 68% to $49.9m, beating analysts’ expectations.

Macquarie has an Outperform rating with a price target of $32.60. This broker liked the expansion in platform earnings margins as interest rates rose.

Hub24’s first half platform EBITDA of $102.7m exceeded expectations due to robust growth in FUA and higher platform revenue margins – that margin stood at 37bps, up 5bps from the same period a year ago.

Shaw and Partners also has a Buy rating and says Hub24’s outlook remains solid, with catalysts including further margin upside as interest rates rise and independent platform tailwinds remaining intact.

According to UBS, over the past five years, specialist platform providers Hub24 and competitor Netwealth Group ((NWL)) have taken in over $80bn in net flows, whilst incumbent advisory providers have seen net outflows in excess of -$20bn.

Inflows have been increasing because of greater penetration into advisor headcount and directly winning clients, sources UBS anticipates will remain be flow drivers for these platforms.

Macquarie prefers Netwealth, noting that Hub24’s projected FY23-26 three-year earnings compound annual growth rate (CAGR) of 19% lags that of Netwealth at 26%.

Good times to roll into 2024

Management at Hub24 expects momentum to continue and reaffirmed its total FUA target of $80bn to $89bn for FY24.

Management’s ambition compares to Citi’s estimate of $79.5bn and market consensus at $78.6bn. Morgans total FUA estimate sits at $77.3bn.

According to Citi, Hub24 has had a better start to the second half of FY23 than Netwealth, with its platform FUA rising by $2.7bn or around 4.8% to $58.5bn between December 31 and  February 17.

Citi sees some potential upside to consensus revenue forecasts for the second half on the back of market movements, though it too suspects higher cost growth in the platform business will limit further upside.

Citi has a $29.00 target price and Neutral rating on the stock.

Margins expand as funds flow in

According to Morgans, Hub24 is delivering ‘cleaner’ financials and its product offering is industry leading, along with Netwealth’s.

Morgans also notes the platform underlying EBITDA margin expanded 150bps to 40.3%, though cost growth is running at 20% from a year earlier and this could be a risk to earnings growth.

Morgans has an Add rating and a target price of $31.90.

Jarden points out that stronger platform revenue margins were helped by a much higher contribution from cash account revenues, accounting for 80% of incremental platform revenue growth from the second half of FY22.

While this reflects more cash inflows due to higher interest rates, Hub24 benefitted from superannuation inflows too, unlike Netweath.

Jarden has a Neutral rating on the stock with a price target of $28.05. Key risks identified include lower net flows due to competition and weaker equity markets, as well as ongoing pressure on costs.

Evans and Partners is more pessimistic. While Hub24 remains well placed to continue to gain share from legacy platforms, the stock is considered “expensive” trading on circa 35x forecast FY24 EPS.

This broker has a Neutral rating with a valuation of $27.40 and thus would prefer to wait for a more attractive entry point.

“This is particularly so when the business is investing heavily in the cost base, as the risk of margin compression if circumstances outside of management's control deteriorate.”

Shares in Hub24 have performed strongly thus far in 2023, also helped by the fact the interim result beat analysts’ expectations.

The shares have risen in excess of 12% throughout January and February compared with the ASX200 only advancing by circa 3.4%.

FNArena’s consensus target post-result sits at $31.75 suggesting upside potential in excess of 12% from today’s $28.27 share price level.

FNArena’s consensus target has been derived from research published by Credit Suisse, Ord Minnett, Morgans, Macquarie, Citi and UBS.

The aforementioned Jarden and Evans and Partners are not covered daily by FNArena’s Australian Broker Call Report.

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