Hub24 Record Sparks Valuation Concerns

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Wealth management platform Hub24 posted record net inflows in the December quarter, well ahead of forecasts, but an elevated valuation is under question.

-Hub24 breaks funds inflow record
-Ongoing and new platform migrations support flows
-Advisor numbers increase beyond expectation
-Strong share price rally keeps most ratings on Neutral/Hold

By Greg Peel

Wealth management platform Hub24 ((HUB)) has reported December quarter net inflows around 10% above consensus forecasts. Management reiterated confidence in meeting an aspirational FY26 platform funds under management (FUA) target of $115-$123bn. Current flows and market movements are progressing ahead of the company’s internal assumptions.

Hub24 enjoyed record net inflows over the quarter of $5.5bn. Platform FUA grew 8.1% sequentially, comprising net inflows of 6.0% and a market movement of 2.1%. Bell Potter notes this demonstrates an allocation to global equities with a declining AUD. Markets were mixed over the quarter with the ASX200 returning -0.8%, S&P 500 2.1% and MSCI World -0.4%.

Outflows of -2.9% drove the beat (compared to -3.5% a year ago). It was the strongest result since March 2022.

Pooled Cash, despite the uplift in equity markets, remained broadly consistent with that of second half FY24 (some 7% FUA) — an impressive result, Wilsons suggests, highlighting the recent trend of Pooled Cash as a percentage of FUA compression continues to abate.

Financial intermediaries (advisors) grew by 166 versus an average of 128 from the first quarter FY19 to the first quarter FY25. Advisor numbers grew by 13.7% year on year to 4886.

Organic and Inorganic

Total platform FUA grew to $12.9bn, ahead of expectation, which includes funds from the 2020 acquisition of Ord Minnett’s Portfolio Administration & Reporting Service (PARS).

In 2023, Hub24 entered into an agreement to provide Equity Trustees ((EQT)) with custodial platform administration and technology solutions. The EQT transition remains on track with $1.5bn migrated in the December quarter to bring total migrated to date to $4.1bn. Management continues to expect the remainder of FUA ($0.9bn) to migrate in the second half.

Hub24 Super was selected during the quarter as the successor fund for ClearView Wealth Foundations with up to $1.3b of new FUA to be moved onto Hub’s Discover solution (Retail FUA).

On the other hand, the wealth platform announced the closure of the Xplore Managed Discretionary Account service which currently holds some $2bn of FUA, but announced it had been chosen as the successor fund for $1.3bn.

Management nevertheless suggested it considers some $2bn to be “at risk” of moving elsewhere. Citi expects majority of the FUA to move away from Hub and would further raise questions on Hub’s M&A strategy. However looking ahead, Citi sees the decision as a positive as it reduces operational complexity and likely improves operating leverage.

Valuation

Looking forward, Jarden sees scope for Hub to continue to gain market share, with the FY26 outlook increasingly well underpinned by: i) growing adviser numbers on the platform, ii) new distribution agreements, and iii) more than $2bn from one-off migrations (EQT and ClearView). Accordingly, Jarden views Hub’s FY26 FUA guidance of $115-123bn as conservative, particularly relative to the broker’s updated view of FY26 for FUA of $135bn.

With Hub continuing to invest in a range of features including a pilot for Engage, further property features for Class and additional forex capabilities, the growth outlook appears to be solid, Jarden suggests. Nevertheless, although Hub offers better than 25% two-year earnings per share growth, trading at a rich valuation (12 month forward PE of 55.5x), Jarden believes the positive outlook is largely priced in and retains an Underweight rating.

Jarden’s price target increases to $60.05 from $50.85.

Hub’s December quarter headline net flows were the largest on record and beat expectations, with large client migrations landing and strong organic net flows coupled with solid adviser growth. UBS lifts its FY25 flows forecast to $18.7bn and considers current guidance cum-upgrade.

Yet, while operating momentum is strong, with Hub now trading at around a 20% premium to its five-year average PE, UBS sees limited value appeal, supporting a Neutral rating. UBS’ target rises to $75.50 from $70.00.

At a 55x PE, and around a 28% FY24-FY27 compound annual earnings growth rate, valuation equally remains a challenge for Moelis, as the market appears to be capturing significant growth over the next five years for both Hub24 and the industry. This broker maintains a Hold rating with a target price of $77.08, up from $67.92.

Citi upgrades its net flow forecasts for FY25 to $18.8bn (up 8%) and this could be conservative, the broker admits. Citi lifts its target to $74.50 from $73.80 and maintains a Neutral rating.

Hub’s quarterly update was “excellent”, in Ord Minnett’s view, with persistent and broad-based natural flow across the platform. Given recent share price weakness, and an obvious continuation of recent strong operating performance, Ord Minnett takes the opportunity to upgrade to Buy from Hold, with a target of $73.00.

The update further demonstrated Hub’s increasingly strong position and momentum in the market with Pooled Cash pleasingly also stabilising further, Wilsons believes. This broker continues to see a strong earnings growth outlook with Hub clearly well ahead of near-term targets. Wilsons is Overweight.

While Hub is currently trading at an elevated one-year forward PE, Bell Potter would view this as a blunt instrument given i) the high growth, ii) longer-term appeal, and iii) confidence in the operating conditions to FY26. Bell Potter has elected to drop its discounted cash flow valuation, increasing its target price by 8% to $79.20 using a sum-of-the-parts model.

Bell Potter’s Buy rating is predicated on Hub’s solution ecosystem and enterprise value to FUA discount versus rival Netwealth Group ((NWL)).

In a brief note, Morgan Stanley reiterated its Overweight rating and $71.00 target.

Canaccord Genuity has downgraded to Hold from Buy, on valuation, as its revised price target doesn’t reach beyond $74.65 (up from $65.80). Canaccord’s own industry feedback has firmed the view both Hub24 and Netwealth will continue increasing their market share in the years ahead.

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