The bigger picture
Shares in HUB24 (ASX:HUB) regained upward momentum following our last review, pushing back up towards record highs. However positive sentiment has dissipated over the course of the last week, and following an announcement from listed peer Netwealth, which could have implications for HUB24’s margin outlook.
The financial service platform provider’s shares are back around the levels of our most recent buy recommendation, and we believe this is an opportune time for Members who don’t own the stock to consider doing so now. Particularly as the overall operating leverage to rising funds under administration, and earnings growth story, remains very much in place in the bigger picture. HUB24 (and other rivals such as Praemium) have benefitted from an increasing move to independents, and away from traditional fund management providers in recent years – we expect this trend to continue.
Last Thursday, Netwealth, the biggest listed player in the sector, announced that it was in negotiations with ANZ and other banks to establish an alternate facility and deposit rate with its current agreement with the bank to be terminated 24 March 2022. The current agreement provides a margin of 95 basis points above the T overnight cash rate, and will continue for 12 months. Shares in Netwealth sank 14%, as did HUB24’s.
Investors are clearly concerned that other players, and HUB in particular, will have their agreements terminated, and ultimately what this will do for margins, and potentially inflows down the track. Falling cash rates have already been putting pressure on cash administration margins, so this is nothing particularly new. And these will ultimately recover, and potentially later next year should the RBA (as we believe that will) looks to tighten rates as inflation comes through the system.
The likes of HUB24 (ASX:HUB) make good ‘cracker’ from deposit rate margins, and this could potentially have some impact on earnings, but we don’t think that the wider trend towards independents is about to reverse anytime soon. Praemium CEO Michael Ohanessian summed it up well last year in saying that the independent financial service providers were the “Goldilocks” platforms, as they have the scale and functionality to properly service the complex needs of their financial adviser target market without the “scar tissue” and legacy of the largest bank-owned and institutional wealth platforms. In other words, they are ‘just right.’ We agree.
The fallout from the Royal Commission continues to have an impact, which should see the market share of the independents continue to rise (it has roughly doubled over the past 5 years to around 5%) and propelling funds administration as well are a rising stock market, and household wealth generally. This is the bigger picture, and one that drives the operating leverage thematic we have backed.
It was poignant therefore that last week the ABS reported total household wealth in Australia rose 4.3% to $12,033.5 billion in the December quarter, the fastest growth in 12 years. A rising housing market has helped, but growth in financial assets (of $272 billion) underpinned the gains – this was as superannuation reserves rose $166 billion, and there was a $61 billion rise in the value of shares and other equity.
The likes of HUB24 (ASX:HUB) (and Praemium) are well placed to continue riding this wave, and the ASX200 ultimately pushed beyond record highs.
HUB24’s leverage has increased even further following corporate manoeuvres in expanding the business inorganically with the acquisition of rival platform Xplore Wealth and a 31% interest in Easton Investments. Xplore, once transitioned completely, should at least expand FUA by $16.6 billion as well as deliver cost synergies of circa $10 million.
Paragem, its licensee business for Financial Advisors, has also been transferred to Easton (as part of the deal) which has reduced HUB’s direct exposure to the Financial Planning side but opens up the potential for a captive market for its data and technology services. Given the Licensee business has some headwinds with more advisors moving towards ‘self-licensing’ and the institution licensing business continues to see a decline, we believe the move was a prudent one.
This is while FUA has grown to a record $31.3 billion and puts HUB24 (ASX:HUB) as the second largest independent player (behind Netwealth). We’re also pleased to see the steady growth of net inflows showing that the company continues to gain more market share. This is all driving earnings growth, and was behind a 30% gain in gross profits at the half year to $36.4 million. The gross profit margin has improved substantially from 46% in 1H19 to sit 59%.
Source: HUB24 (ASX:HUB)
Management has upgraded targets on Platform FUA range of $43 billion to $49 billion from $28 billion to $32 billion by the end of FY22. Management notes that these targets are well within reach despite COVID-19 given the recent acquisitions and strong inflows. Interestingly as we have previously noted, HUB24 has overtaken rival Netwealth for the first time in research house Investment Trends’ sector rankings and has been crowned the “best overall platform.”
We retain our long-term positive view on HUB24 (ASX:HUB), and indeed on the other financial service platform operators which we cover, given the degree of implicit operating leverage. A high degree of fixed costs will see the current lofty earnings multiples drop away over time, as HUB24 (ASX:HUB) continues to grab market share in a fragmented sector, and with Australia’s underlying pot of investable funds growing strongly.
We maintain a Buy rating on HUB24 (ASX:HUB) for Members without exposure.
Disclosure: Interests associated with Fat Prophets declare a holding in HUB24 (ASX:HUB) and Praemium.
