Impressive Pace
Investment platform operator, HUB24 (ASX:HUB) reported a very strong fiscal 2018 result showcasing the benefits of increasing scale as a high degree of operating leverage led to a significant leap in profit following its maiden profit last year. With the stock dropping sharply from recent highs during the market pullback, we believe a buying opportunity exists.
What’s New?
In our last coverage of the superannuation platform back in July (FAT-AUS-884), we covered what was then seen as one of the most pressing developments in the sector when Westpac’s Wealth Management arm, the BT Financial Group, announced a fee cut.
The market initially saw that event as the beginnings of a ‘price war’ which we dispelled as largely a ‘marketing gimmick’ to attract the larger funds (since it wasn’t targeting the average Australian investor) as well as a ‘streamlining’ effort for them.
Nevertheless, the market reacted and HUB’s price moved more than 20% lower following the news of the ‘price cut’ in the sector. However, we believe that ‘price cut’ was mainly noise as more funds still flowed into Specialist Platform players such as HUB, leading to more market share gains to 67% as reflected in the chart below:
Source: 22 October 2018 Company Filing
We also want to highlight the secular shift noted in the industry with more Financial Advisers moving out of ‘big banks’ to independent players especially in the wake of the “Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry” and other regulatory changes placing ‘big banks’ under greater scrutiny for improper conduct such as imposing ‘fees for no service’.
That said, and looking specifically at the progress HUB has made thus far, proves that the Independent Specialist Platforms are set to reap the benefits with the Quarterly Net Inflow for the 1Q19 hitting record highs of $638 million. The positive trends are reflected in the graphic below:
Source: 22 October 2018 Company Filing
The record level of inflows has led to Funds Under Administration (FUA) to reach $9.14 billion, up 50.5% year-on-year making the company the ‘fastest growing platform provider’ and gaining more market share. The fund also onboarded 92 new advisers with 18 new licensee agreements which bode well for FUA pipeline growth down the line. The table below provides a clearer breakdown of the developments.
Source: 22 October 2018 Company Filing
Going forward, we believe that HUB24 (ASX:HUB) can sustain its pace of growth with the ongoing improvements of its platform which provides Financial Advisers a broad range of investment products across asset classes, while offering them the option to have maintain their own respective brands with the ‘white label’ option.
Aside from the Quarterly Trading update, the company also announced in late August its annual results, which showed positive momentum and scale benefits:
FY18 Results Review
Starting from the headline numbers and FY18 also reported solid FUA growth, up 51% to $8.34 billion and this led to a significant bump in revenues. The strong inflows led to a standout performance for its flagship Platform business for which revenue was up 51% year-on-year to $39.7 million and now accounts for 47% of the total (previously: 42.5%).
The waterfall chart below illustrates the contributors to revenue growth:
Source: 20 August 2018 Company Presentation
As a positive effect of the increasing scale of the Platform business, we are seeing a direct impact on Gross Profit Margins which expanded to 40.8% compared to last year’s 33.6%. Gross Profits, consequently, accelerated at a faster 65% pace to end the year at $34.3 million.
Other Segments also provided a boost to revenue with Licensee solutions providing the second largest source, up 16% year-on-year to $35.8 million. This business generates its revenues from onboarding individual advisors that want to start their own practices separate from large institutions.
The IT Services business provides the smallest chunk of revenues and is a recent addition to the company’s business model where it provides a customisable platform that can also integrate 3rd party software under one roof. We believe this is a high growth business as it synergises easily with the other segments and can attract new Financial Advisers which use different software.
Moving on to profitability, the major source of operational profit is the Platform business which has already realised scale. The Licensee and IT Services business both detracted a bit due to the smaller scale and earlier stages of their respective life cycles. That said, group underlying EBITDA more than doubled year-on-year to $11.4 million as reflected in the waterfall chart below:
Source: 20 August 2018 Company Presentation
Moving on to the bottomline and given the rapid pace of growth, Underlying NPAT for the year more than doubled (+125% yoy) to $5.4 million and is set to scale faster as the company maintains momentum.
Source: 20 August 2018 Company Filing
On the daily chart, prices have sustained a steep decline since the May highs, with a drop below dynamic support at $11.91, being the 50 day moving average. Support at the April high of $11.42 has also given way. A stern layer of support does exist however in the $9.88/$10 region which should act as a buttress, and potentially the platform for a bounce.
With reference to the monthly chart, the long-term uptrend remains intact overall. Previous all-time highs have been taken out this year, with prices pulling back to find support around the 61.8% Fibonacci retracement at $11.20 (although this is being tested). This level will need to hold to avert a move back towards the 50% Fibonacci retracement at $9.00.
Summary
Investment platform operator, HUB24 (ASX:HUB) reported a very strong fiscal 2018 result showcasing the benefits of increasing scale as a high degree of operating leverage led to a significant leap in profit following its maiden profit last year.
Going forward, the Superannuation platform is also set to deliver another year of solid results, with a secular shift favouring independent players as well as the growing opportunity in the Superannuation sector which is set to grow to over $1.5 trillion by 2026.
With the stock dropping sharply from recent highs during the market pullback, we believe a buying opportunity exists.
We rate HUB24 (ASX:HUB) as a BUY for Members without exposure to the stock.
