HUB24: Flows remain classy

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

20 January 2022, 9:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• HUB reported 2Q22 total FUA of A$68.3bn, with net inflows of A$3.6bn the primary driver (a total of A$4.6bn qtrly FUA uplift).
• Total 2Q22 net inflows of A$3.6bn, included a relatively small $349m transition from IFL. Total flows for 1H22 (A$6.7bn) sets a run-rate well ahead of the implied ~A$10bn pa in HUB’s FY23 FUA target (of A$63-70bn).
• 2Q22 adviser numbers increased 5.6% qoq (+22% annualised run-rate).
• We retain an Add recommendation.
• HUB continues to show evidence their market share can continue to 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: 2Q22 FUA update - flow momentum continues

HUB ended 2Q22 with FUA of A$68.3bn, up 8.2% for the quarter. FUA composition was: Platform ~A$50bn (+10.2% qoq; +50% on the pcp, adjusting for acquisitions) and PARS FUA A$18.3bn (+3.2% qoq).

Net inflows drove FUA growth (A$3.6bn net inflows; ~A$1bn investment performance). Net flows were up 19.6% qoq and +127% on pcp. Flows included a A$349m transition from IFL. Whilst relatively small, we think it shows that the relationship could meaningfully expand. Excluding the transition, 1H22 net inflows of A$6.3bn put HUB on a run-rate well ahead of the group’s targeted A$9-10bn (implied in the FY23 FUA target).

Adviser growth to 3,402 (+5.6% qoq; and +49.2% on pcp) remains strong, with the 2Q annualised run-rate still at +22% pa. A further 28 licensee agreements were put in place, in-line with recent trend numbers.

Upcoming result

1H22 result: full expectations will be provided in the Morgans Reporting Season Playbook. We expect Platform revenue margin of 29.8% (from 44.7bps pcp), which is in-line with HUB’s outlook statements for the year (improved trading revenue may see it slightly better than expectations). We expect Platform EBITDA margin of 39.3%, marginally down on pcp and above FY21 (37.5%).

HUB have pre-disclosed a step up in share based payments (SBP) and acquisition amortisation. SBP expense will include a A$3.5m expense from FUA linked performance rights; and a A$4.5m additional amortisation charge related to the XPL acquisition. Both will impact the reported result.

Pooled cash resolution: HUB’s current pooled cash arrangement concludes in Nov-22, with NWL’s in Mar-22. We expect commentary from NWL imminently (quarterly or result), which should provide a ‘base line’ for HUB. We assume a 45bps lower ‘take rate’ from 2H23 in HUB forecasts.

Forecast and valuation update

We make relatively minor changes to forecasts, with slightly improved revenue offset by higher SBP expense.

The CL1 scheme vote is scheduled for 31-Jan. We expect the acquisition to go ahead, however note CL1 is not factored into our forecasts or valuation as yet. HUB guided to ~8% EPS accretion (pro-forma FY22). On a standalone basis (not factoring in any benefits from combining the groups), we expect it to be slightly dilutive to our current HUB valuation. 

Investment view: Add maintained

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.

Price catalyst 

Catalysts include evidence of scale benefits coming through; clarity on ANZ pooled cash margin; large client wins (FUA transition); and acquisitions.

Risks

Worse than expected pooled cash outcome margin outcome; inability to deliver margin improvement medium-term; lower net inflows.

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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.