HUB24: Flows trump revenue margin
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 25 August 2021, 7:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- HUB24 (ASX:HUB) reported in line with expectations: underlying EBITDA A$36.2m (+47% on pcp) and underlying FY21 NPAT A$15m, +49% on pcp.
- Platform retail revenue margin contracted more than expected. HUB stated that the Admin fee pricing environment is stable and op margin expansion is expected.
- FY22 has commenced strongly with implied net inflows of ~A$1.6bn FYTD, a runrate +100% on the pcp and +10% on 4Q21. Net inflow momentum supports HUB’s FY23 FUA target of A$63-70bn (+60% over two-years from A$41.4bn).
- We move back to taking a long-term view on HUB and upgrade to Add. Capturing the industry structural change and delivering operating leverage via scale is the base case over the next five years. Benefitting further from potential private label opportunities, transitions and industry consolidation is potential upside.
FY21 result: in-line overall, with the Platform revenue margin a slight miss
Underlying EBITDA was up 47% to A$36.2m, with hoh growth of 18%.
2H21 Platform revenue missed expectations by ~4% on the back of revenue margin compression. 2H21 Retail FUA revenue margin was 37bp (39bp expected). Platform EBITDA (A$37.9m) was in-line, with the 2H21 margin dropping ~400bp hoh post including acquisitions (primarily XPL).
Op cash flow was down ~24% to A$19.2m, impacted by ~A$7.2m of acquisition costs. Gross operating CF conversion was reasonable at ~78%. HUB ended with A$51m net cash (vs A$33.8m in pcp).
Pre-released metrics for FY21: Platform FUA A$41.4bn, +140% on pcp (+76% exacquisitions); total inflows A$8.9bn (+80%); advisers 3,063 (+48% on pcp).
FUA step up looks to outweigh revenue margin compression
Revenue margin compression: 2H21 revenue margin was 37bp ex-XPL and 34bps inc-XPL (XPL was a 4-month contribution); down from 44bps in 1H21. HUB stated that a run-rate margin for FY22 was ~30bps, with the Admin fee pricing environment stable.
FY23 FUA target of A$63-70bn: HUB rolled forward its FUA target to FY23 (previously A$44-49bn FY22). HUB expects net inflows of ~A$9-10bn pa over FY22/23, which would secure ~A$60bn by FY23. The implied weekly net inflow of ~A$210m YTD (annualised ~A$11bn) supports HUB’s net inflow statements as does the growth in advisers (+34% excluding XPL).
Cost growth, but still expecting underlying margin expansion: HUB stated that whilst investment continues to ramp up (expected ~20-25 additional FTEs in tech and corporate roles), EBITDA margin expansion is expected to be delivered in FY22 (from the 37.5% FY21 underlying Platform margin).
Pooled cash: we factor in a 35bps ‘take rate’ reduction on pooled cash from 2H23, a material (~A$17m pa) revenue hit that is absorbed within our forecasts.
HUB commenced its private label agreement with IFL in July-21. We see FUA ‘transition’ potential from this relationship over time, providing upside earnings risk.
We upgrade FY22 EBITDA by 8% on the back of stronger FUA growth. FY23/24 EBITDA is downgraded by 4% (slower margin expansion coming through).
Investment view: moving back to an Add
We upgrade to Add moving back to a long-term view. DCF valuation (login to view target price).
HUB continues to show evidence it is (and will further) materially increase market share. We expect scale benefits to deliver a step-change in earnings over the next three years, with long-term growth thereafter supported by the entrenched nature of the platform within the adviser base.
Price catalysts: accelerated flows
Large client wins (FUA transition); accelerated flows; clarity on ANZ pooled cash margin; evidence of scale benefits coming through; acquisitions.
Worse-than-expected pooled cash margin outcome; inability to deliver margin improvement medium-term; lower net inflows.
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