We recently researched HUB24 (ASX:HUB) following a Company update and recent acquisition. We took a NEUTRAL view on the shares on the basis that there was downside risk to earnings growth over the medium term and the fact that the announced acquisition was not well received by the market. Our charting analysis also indicated the likelihood of some further downside towards $25. With that downside target now achieved, do current levels present a more attractive entry opportunity?

Overview of HUB24

HUB24 is a specialist retail wealth management platform provider that enables investors to acquire, hold, administer and monitor the performance of their investments. Products consist of the award-winning HUB24 platform, HUBconnect and the Xplore platform. HUB offers advisers and their clients a comprehensive range of investment options, including market leading managed portfolio solutions, and enhanced transaction and reporting functionality. The Company has three operating businesses, with the primary driver of earnings being its Platform segment.

Key Fundamental Drivers

Is the FY24 FUA Target Achievable?

In a trading update issued to the ASX on 19 April for the three months to 31 March 2023 (3Q23), HUB reported total Funds Under Administration (FUA) of $76.9b as at 31 March 2023, comprising Platform FUA of $59.4b (up 16.5% on the prior corresponding period (pcp)) and Portfolio, Administration and Reporting Services (PARS) FUA of $17.5b (+1.0% on the pcp). The key factors underpinning the likely success in HUB achieving the FY24 FUA target include:

i. The potential for larger ‘transition’ deals. HUB has previously articulated annual net inflows of $11-13b to reach the FY24 FUA target. However, excluded large transitions, this run-rate appears optimistic based on current conditions.

ii. Securing additional advisers. HUB’s Adviser growth in recent quarters has been relatively soft and below the historical range of ~120-180 prior to 2Q22. The slowdown in adviser growth reflects a combination of investment market conditions and an overall slowdown of adviser churn, especially following the Royal Commission in financial services, which concluded in February 2019. Having said that, there are several factors underpinning the prospect for further adviser additions over the medium term. These include: a) Lifting the FUA per adviser towards the industry average and b) HUB likely to benefit from the underperformance of some of the incumbent platforms which have been subject to outages and low Net Promoter Score (NPS) in the near past – which contrasts to HUB achieving #1 platform across all categories.

Weakness in Net Inflows – But HUB Outperforming Key Competitor

Core inflows have slowed across the industry, which is due to a combination of uncertain investment markets (less investor/advisor ‘urgency’); some investments moving off platform and into other interest rate leveraged products such as Term Deposits and a maturing ‘transition’ profile as adviser moves slow.

Weakness in HUB’s platform net inflows for the 3rd quarter of financial year 2023 (3Q23) appears to be largely due to a slowdown in gross inflows relative to prior quarters. Accordingly, a recovery in net inflows is contingent on an improved in gross outflows decelerating over the coming quarters, which in turn is reliant on market volatility dissipating and a level of consumer confidence returning.

In comparison to its ASX-listed competitor Netwealth Group (ASX:NWL), HUB is benefiting from a greater superannuation FUA mix. HUB’s more resilient trends saw it outpace NWL (-37% on the pcp) for a 3rd consecutive quarter. Compared to NWL, gross flows were better as % of FuA (6.5% vs. 5.8% for NWL), however the quarter-on-quarter decline was larger (-17% vs. -12%).

Group Operating Leverage Hampered by Tech Solutions Segment

Platform underlying EBITDA margin expanded by ~150 basis point to 40.3% in 1H23, despite ongoing recruitment and HUB platform operating expenses increasing by 30%. However, the Tech Solutions segment is a drag on group performance, pushing group EBITDA margin down to 36.2% (compared to the Platform underlying EBITDA margin of 40.3%). The Tech Solutions segment comprises HUB’s technology an include HUBConnect and Class (acquired in mid-2021), which is a market-leading SMSF administration software provider. Both of these businesses performed below expectations in 1H23.

The Tech Solutions segment reported revenue growth of 28% to $33.4m; and flat EBITDA to $10.5m. The flat EBITDA result was due to Class’ alignment to the group’s CAPEX policy (capitalising fixed assets, leasing and software costs). Excluding the CAPEX adjustments, the Tech Solutions business delivered a flat EBITDA margin result of 40.5%.

Class’ revenue has been flat since 1H22, with the change in accounting policy impacting margins. There is potential for revenue synergies from the Class acquisition as an integrated offering would allow HUB to attract addition flows from SMSFs. This factor underpins expectations for Class’ revenue growth to be around low-mid single digit and for EBITDA margin to return to ~40% (from 35% in 1H23) as synergies are realised.

Strong Balance Sheet

HUB remains well capitalised, with net cash of $30.7m as at 31 December 2022. The strong net cash position enables the Company to re-invest in expanding the executive team, hiring additional distribution staff and investing in technology to support scale and brand development.

Acquisition of myprosperity Has Not Been Well Received

On 3 May 2023, the Company announced an agreement to acquire myprosperity, which is a leading provider of client portals for accountants and financial advisers. Unfortunately, the acquisition has not been well received by the market and has been a key factor underpinning the recent weakness in the share price, in our view.

While the acquisition of myprosperity appears strategically sound – as there are cross-selling opportunities and accelerating delivery of HUB’s ‘Platform of the Future’ strategy by essentially becoming the front-end for financial advisers/accountants – the multiple paid by HUB appears expensive. As such, meaningful EPS benefits appear both long dated and highly dependent on significant subscriber growth and incremental platform net flow benefits. Accordingly, the acquisition is expected to be dilutive to EPS by ~2-3% over FY24-25, with the deal to only become EPS accretive in FY27.

Fundamental View

HUB shares are currently trading on a 1-year forward P/E multiple of ~31x, which is below the lower end of the 5-year trading range and below the average multiple of ~47x over the same time period. However, we take a cautious view on the shares, as we consider that there is downside risk to current EPS growth forecasts of +29% over FY22-25 on a CAGR basis, given the potential for further fund outflows from: i) Renewed uncertainty in investment markets following the RBA’s recent unexpected rise in the official cash rates, as well as ii) A movement of funds off the HUB24 platform to other interest rate leveraged products such as Term Deposits.

Charting View

In our prior research in The Dynamic Investor, we anticipated HUB to fall towards $25. Although it is at that price point, we are not seeing evidence of buying support step in. If we don’t see a high volume turnaround from here, then we would expect further weakness in the share price. The next support levels down are $24 and then $22.50.

 

Michael Gable is managing director of Fairmont Equities.

 

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