HUB24: Cash windfall

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

22 February 2023, 8:30 AM

Sectors Covered:

Diversified Financials, Professional Services

• HUB24 (ASX:HUB) reported above expectations: underlying EBITDA A$49.9m (+23% on 2H22; +10% on MorgansF); and underlying NPAT of A$26.6m (+23% on 2H22).
• Whilst expected strength, higher earnings on pooled cash drove revenue margin and the result ‘beat’. Versus 2H22: Avg FUA +6%; platform rev +23%.
• Revenue margin (+5.6bps to 37.9bps) normalises by ~1.5bp from 2H23. Cost growth was also evident, +25% HOH. This limits 2H23 Platform EBITDA growth.
• HUB looks to be delivering ‘cleaner’ financials; the product offering is industry leading (along with NWL); and the runway to secure more clients looks intact. Whilst upside to our valuation is reasonably low, the potential for larger ‘transitions’ wins is a realistic catalyst within CY23. Add maintained.

1H23: pooled cash drives revenue +24% on pcp

Group underlying EBITDA (pre-SBP) was +23% hoh to A$49.9m.

Platform revenue growth (A$102.7m; +33% pcp and +23% hoh) was delivered on avg FUA +6%. Revenue margin (+5bps to 37bps) benefitted from higher pooled cash earnings, with ‘peak’ margin on pooled cash of ~172bps effective until Dec-22.

HUB noted the re-pricing of the pooled cash rate (20-30bps lower as at 1-Dec) will lower platform revenue margin by 1-2bps (we est 1.5bps in 2H23).

Platform underlying EBITDA margin expanded ~150bps to 40.3%, with cost growth running at 20% hoh. Headcount increased by 36 FTE to 522 (~7.4% growth). 

Underlying op cash flow (pre one-offs) of A$43m (86% of U-EBITDA; +135% on pcp; and flat hoh) was solid. Net cash ended at A$30.7m.

1H23 pre-released metrics: Platform FUA of A$55.8bn, +11.7% pcp; Net inflows of A$5.8bn, +13.5% hoh; advisers 3,692 (+8.5% on pcp).

Targets reaffirmed and solid momentum in place

FUA guidance reaffirmed: HUB reaffirmed its FY24-end FUA target of A$80-89bn (>43% growth expected in 18-mths).

Current FUA (17-Feb) stands at A$58.5bn, +4.8% from Dec-22 levels implies net inflows of ~A$0.9-0.95bn for the six weeks (inc the seasonally quiet Jan month). 

In reaffirming the FUA target, mgmt expressed confidence in the potential for larger ‘transition’ deals to be executed to reach the FY24 target. Our FY24 FUA estimate sits at A$77.3bn (using reasonable market/flows assumptions), so we expect there is some reliance on a larger client win to hit the target. 

Normalising operating metrics 2H23: HUB’s will earn ~A$4.5m lower revenue on pooled cash from 2H23 (assuming steady cash balances and a ~22bp lower margin on the ~A$4bn in pooled cash). Expense growth will continue from a full run-rate of the headcount expense and a further 20-40 hires to be made in 2H23.

We expect this to limit 2H23 Platform EBITDA growth (+4.7% forecast) and see slight 2H margin decline (-100bps). HUB indicated high confidence in leveraging the ongoing opex investment to drive long-term growth.

Strategy execution on track: HUB reaffirmed acquisition synergy targets; FUA targets; no further step-up in investment flagged; and the core Platform now rates #1 by the industry benchmarker (we regard NWL as an equal leader).

Forecast upgrades

EPS forecasts changes: FY23 +13.7%; FY24 +11.1%; FY25 +11.7%.

Investment view – Add maintained

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

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:

• Improved market conditions and flows.
• Large client wins (FUA transition).
• Evidence of scale benefits coming through.

Risks include:

• A step-up investment costs.
• Lower cash earnings (balances falling).
• Sustained lower net inflows.
• Material market fall.
• Inability to deliver margin improvement medium-term.
• Competitor model/pricing disruption.

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