HUB24: Having to invest further to be top of the class

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

25 August 2022, 7:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• HUB24’s (ASX:HUB) underlying EBITDA of A$70.4m was ~3% above expectations, but driven by acquisition (timing) contribution. Platform EBITDA was in line.
• HUB’s FY24 FUA target was lowered to A$80-89bn (previously A$83-92bn), >60% in two years. Management expressed confidence in >A$11bn net inflows pa, with 1H23 commencing solidly (run-rating ~A$2.6bn for 1Q23).
• Adding Class (CL1) and now multiple integration/strategic projects will see material ’below the line’ costs continue. We hold some caution on ongoing acceleration of operational and investment costs to deliver on HUB’s ‘platform of the future’ (pushing out the evidence operating leverage can be achieved).
• We have a slightly more cautious view on HUB’s ability to deliver scale benefits without accelerated investment but continue to be attracted to HUB’s market position and long-term opportunity in the Platform segment – Add maintained.

Core Platform segment growth strong (+64%) – in line with expectations

Group underlying EBITDA was +94.5% on pcp to A$70.4m, including an initial contribution from CL1 (A$9.5m for 4 months). Ex-CL1, underlying EBITDA was +68% on the pcp with HOH growth of 5%.

Platform segment EBITDA of A$62.3m (+58% on pcp) delivered ~7.7% HOH growth (segment operating margin steady at 38.8%).

Underlying op cash flow (pre one-offs) of A$61.3m (87% of U-EBITDA; +110% on pcp) was solid. Significant acquisition/project costs were incurred (A$16.8m vs A$7.2m pcp), which are ongoing. Net cash ended at A$4.1m.

FY22 pre-released metrics: Platform FUA of A$49.7bn, +19.6% pcp; Net inflows of A$11.7bn, +31.7% on pcp; advisers 3,486 (13.8% pcp).

FUA target lowered; revenue margin tailwind; cost growth continues

Headcount growth still significant: ex-CL1, headcount increased 95 FTE to 486 (+24%). HUB noted an expectation of ~15-20% further FTE growth in FY23 (implied ~73-97 increase).

Whilst investment in multiple growth avenues continues, we had expected to see slowing headcount growth given no incremental increase in net inflows is expected (and the existing operational scale of the business).

Revenue margin tailwind into FY23: Platform revenue margin was relatively flat in the year at ~32bps. We expect a meaningful tailwind from pooled cash earnings in 1H23, with ~50bp est improved ‘take rate’ (~A$8.5m additional revenue).

HUB’s pooled cash agreement renews post Nov-22: management expects a lower margin outcome but we think it can be higher vs NWL’s (set in Mar-22).

FY24 FUA target lowered to A$80-89bn: HUB lowered its FY24 FUA target by A$3bn, impacted by negative market moves over 1H23. Hitting the low-end will still be significant (+60%) and implies at least ~A$22bn of net inflows over two years.

Synergies occurring; but another acceleration of expenses the risk: HUB expects combined synergies of A$12-14m pa from FY24 onwards, with a further A$6-11m of implementation costs over FY23/24.

We see some risk around accelerated investment into HUB’s strategic initiatives in ‘platform of the future’ capabilities (single view of wealth; integration of custody and non-custody solutions).

Forecast: minor changes to FY23-25 EPS

EPS forecast changes are within +/- 1.4%.

Investment view

We expect HUB to continue to entrench a market leading position (along with NWL) in the platform sector, which is a key attraction.

Delivering on the investment via improved cash earnings is key. HUB’s longer-term play in integrating other parts of the value chain is likely to deliver diversification, long-term client relevance and additional value in time. Add maintained.

Catalysts and risks

Catalysts: better-than-expected margin on cash; improved market conditions and flows; large client wins (FUA transition); evidence of scale benefits coming through.

Risks include: a step-up investment costs; sustained lower net inflows; material market fall; inability to deliver margin improvement medium-term; competitor model/pricing disruption.

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