HUB24: Still scaling despite market impacts

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
21 July 2022, 7:30 AM
Sectors Covered:
Diversified Financials, Professional Services

  • HUB24 (ASX:HUB) reported 4Q22 Platform FUA of A$49.7bn, with a 4Q22 A$3.8bn negative market move partially offset by net inflows of A$2.5bn.
  • 4Q22 Platform net inflows of A$2.5bn were flat on pcp (excluding large one-off transitions in pcp) and down ~6.3% qoq. FY22 net inflows were A$11.7bn, +31.7%.
  • Whilst flows and adviser growth have slowed, we expect both will rebound with improved investor confidence (we expect 1H23 to remain subdued). HUB has a revenue tailwind from pooled cash earnings into FY23 and we expect opex growth to slow into FY23/24.
  • Whilst current investment market uncertainty creates challenges for market-linked stocks, we continue to see material and enduring structural growth in HUB. Add.

Event: 4Q22 FUA update

FUA: HUB ended 4Q22 with total FUA of A$65.6bn, down 4% for the quarter (including negative market movement of A$5.2bn) and up 11.8% on the pcp.

Flows: 4Q22 net inflows were A$2.5bn, down 6.3% on prior quarter and down 37.2% on the pcp. Excluding large transitions, flows were broadly flat on the pcp. Total FY22 net inflows were A$11.7bn (+31.7% on pcp).

Advisers: Adviser growth was 54 in the quarter to 3,486 (up 13.8% on pcp; and up 1.6% on Mar-22). Adviser growth was again subdued (3Q22 +30), having averaged ~170/quarter in 1H22.

Adviser priorities impacted in the half (market volatility and fee consent requirements), however we expect adviser growth to return through FY23. The number of licensees added (4Q22 +33) points to this likelihood.

Class: Class closed FY22-end with the strongest 4Q22 since 4Q19 – delivering growth in total net accounts across core products.

Tailwinds into FY23 despite equity market direction pressure

FUA and flows: HUB commences FY23 with FUA ~4.5% above average FY22 levels. We expect solid traditional custody net inflows to continue (forecast ~A$10.5bn), however 1H23 may continue to be relatively subdued given market conditions. Our forecasts include moderate FUA growth from market performance (~3.2% growth on starting FUA).

Pooled cash: HUB’s current agreement with ANZ expires on 1-Dec-22, with HUB stating in June-22 negotiations were ongoing with several providers for a new agreement. In our view, there is upside (to the NWL base case of a 45bps margin cut) to the margin HUB achieves under its new pooled cash arrangement.

Based on the current improved ‘take rate’ on pooled cash (post RBA cash rate increases), HUB has a ~A$10m FY23 NPAT tailwind (assuming stable cash balances).

Cost growth: we expect a relatively flat 2H22 Platform segment EBITDA margin half-on-half (~36.5%), however expect the pooled cash earnings tailwind and slowing incremental cost growth to see margin expansion in FY23 (to ~38.4%).

Minor forecast changes

We make relatively minor EPS changes: FY22 -0.3%, FY23 +1.6%, FY24 -2.3%. The lower starting FUA (vs previous assumptions) is offset by higher pooled cash revenue.

Investment view

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

Operating leverage can be delivered medium term (supporting the current valuation); and 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. Add maintained.

Catalysts and risks

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

Risks include sustained lower net inflows; material market fall; inability to deliver margin improvement med-term; competitor model/pricing disruption.

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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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