HUB24: Results from Class acquisition could take time

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
19 October 2021, 10:30 AM
Sectors Covered:
Diversified Financials, Professional Services

  • HUB24 (ASX:HUB) announced the proposed acquisition of Class (ASX:CL1) for an implied ~A$385m, funded primarily via scrip (~16.5% additional shares issued; ~A$12.4m in cash).
  • Although CL1 has material market share in SMSF admin, HUB looks to have paid a significant premium. We expect the deal is likely to be voted up on this basis.
  • We view FY23 expected EPS accretion of 8% as reasonable, however there is unlikely meaningful cost-out/scale benefits to come. Long-term value accretion from HUB’s ‘platform of the future’ strategy will be key.
  • We haven’t incorporated the acquisition into forecasts at this point. Whilst the proposed deal may dilute the earnings leverage yet to come from HUB’s strongly growing core competency, we are prepared to back the longer-term strategic direction of the group. Add maintained.

Proposed takeover of Class (ASX:CL1)

Consideration: HUB’s offer for CL1 comprises 1 for 11 HUB shares and A$0.10 cash per CL1 share. The implied value of ~A$385m represents a ~70% premium to CL1’s last close. Transaction costs are expected to be A$4-5m; implementation costs A$6m over FY22/23; and cost synergies expected of A$2m pa.

HUB has stated the acquisition is expected to be 8% EPS accretive in FY23 (including cost synergies; excluding one-off costs). The CL1 board will recommend the offer (subject to the usual caveats; details overleaf).

Based on CL1’s FY22 guidance plus cost synergies, implied earnings multiples are ~14.7x EV/EBITDA and ~44x PE.

Building capability for ‘platform of the future’ – but it will take time

CL1 is a leading cloud-based SMSF administration software provider, with 29% share of the addressable SMSF administration software market. CL1 has ~7,700 customers (accounting practices, financial planning practices, administrators), with HUB estimating ~20% of their adviser base is also a CL1 client.

Recent growth momentum of CL1 has improved, in part from acquisitions in the DocTech space. In FY21, CL1 delivered underlying EBITDA of A$21m, up 15%.

From a strategic perspective, HUB is expanding the group’s presence in the ‘implementation of wealth advice’ value chain. Short term, CL1 will be run as a standalone business unit within HUB, however long-term the capability will be utilised to execute HUB’s ‘platform of the future’ strategy.

Revenue opportunities are relatively opaque/long term at this point; however HUB is confident in the revenue opportunities that will arise from being able to execute on end-to-end implementation of wealth advice.

CL1’s capability within portfolio reporting and administration (especially its ‘tax engine’) looks immediately beneficial to HUB’s development of its PARS offering.

Timeline; forecasts and valuation

HUB expects the CL1 shareholder vote to be in mid-late Jan-22, with implementation late Feb-22. We have not incorporated CL1 into forecasts or valuation at this stage, noting that HUB has guided to ~8% EPS accretion in FY22.

The near-term EPS accretion does not directly translate into an equivalent valuation uplift, given the strength of longer-term cash flow growth in our HUB assumptions.

Investment view

On a standalone basis, we suspect the valuation paid and growth trajectory for CL1 is likely to be decretive to our HUB valuation.

However, HUB’s longer-term play in integrating another part of the value chain is likely to deliver diversification, long-term client relevance and additional value if executed. Add maintained.

Price catalysts

Large client wins (FUA transition); accelerated flows; clarity on ANZ pooled cash margin; evidence of scale benefits coming through; acquisitions.

Risks

Worse-than-expected pooled cash margin outcome; inability to deliver margin improvement medium term; lower net inflows.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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