HUB24: Extra Class benefits to be Xplored
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 23 February 2022, 11:30 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- HUB24 (ASX:HUB) reported slightly ahead of expectations: underlying EBITDA A$29.7m (+79% on pcp); and underlying NPAT of A$14.2m (+89% pcp).
- Exceptional FUA growth (~40% pa organically) is translating more directly to revenue (+34% HOH) as the revenue margin stabilises. Heavy investment is still being required; however we expect HUB to deliver operating leverage (more so from FY24+) which is central to the investment case.
- HUB rolled its FUA target to FY24, now targeting A$83-92bn (+75% growth over 2.5 years). Net inflows of ~A$12-14bn pa are the key driver.
- We retain an Add recommendation. HUB continues to show evidence their market share can increase significantly. 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.
Event: Strong 1H22 result
Underlying EBITDA was up 79% on pcp to A$29.7m, with hoh growth of 51.5%.
Platform revenue (+76.5% to A$77.3m) was in-line with expectations. Platform revenue margin contracted to 32bps (from 34bps 2H21), with an expected drop due to a full period contribution of Xplore (lower margin). HUB stated trading activity was at normal levels in the period and the outlook for revenue margin is stable.
Underlying op cash flow (excl. strategic transaction and due diligence costs) was A$18.3m was up ~55% on pcp; and up 15% on 2H21. HUB ended with A$47m in net cash.
1H22 Pre-released metrics: Platform FUA of A$49.9bn, +127.6% pcp (20.6% hoh); Net inflows of A$6.7bn, +19.5% on pcp; advisers 3,204 (49% pcp).
Analysis: Cost growth, but managing to mildly positive jaws
FY23 FUA target of A$83-92bn: HUB rolled forward its FUA target to FY24 (previously A$63-70bn FY23). HUB expects net inflows of ~A$10-14bn pa which accounts for the majority of the uplift (market move assumption ~5% pa). FUA for 2H22 to-date is flat (flows offsetting negative market moves).
Cost growth, but still expecting underlying margin expansion: Platform underlying EBITDA margin was 38.8% (pcp 39.7%; 2H21 35.8%) which was in-line with expectations. Heavy investment is still required (~80 additional FTEs in tech, sales and ops roles; taking FTE to 460) to keep up with the FUA/flows growth.
HUB stated they expect to deliver enhanced margins, however we expect near-term this will be limited despite the revenue growth. We expect meaningful margin expansion to come through more so from 2H24, which will be assisted by: realisation of acquisition synergy run-rates; likely cash rate increases assisting pooled cash revenue; potential Class acquisition revenue synergies; and lower incremental growth in net inflows yoy.
Adding in Class (CL1): the Class acquisition was implemented 16 Feb. Unaudited 1H22 EBITDA for CL1 was A$10.7m (although we note high D&A and capex in the business). HUB stated that benefits beyond the 8% initial EPS accretion are expected and these will be articulated once the strategy is bedded down.
Forecast and valuation update
We add CL1 into forecasts, the primary driver in upgrades: EPS FY22-24 of 9.8%/ 3%/5.4%.
We retain an Add recommendation. HUB continues to deliver on top-line growth, with expected scale benefits (operating leverage) to come medium-term.
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.
Catalysts include evidence of scale benefits coming through; RBA cash rate increases; large client wins (FUA transition); and acquisitions.
Worse than expected pooled cash outcome margin outcome; inability to deliver margin improvement medium-term; lower net inflows.
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