Small Caps | Aug 29 2019
Costs are catching up with HUB24 as the business scales up to take advantage of the plethora of advisers switching to independent platforms.
-Downside risks to platform pricing from lower interest rates
-Share price vulnerable to concerns about how the sector will manage a lower cash rate
-Lower interest rates may also lead to higher costs for account holders
By Eva Brocklehurst
HUB24 ((HUB)) is continuing to invest in sales and IT resources as more and more financial advisers are signalling intentions to switch platforms. HUB24 ranks third, Ord Minnett assesses, as the most prominent candidate to win this business.
The broker calculates the business switch is worth over $20bn alone and, as HUB24 invests to take advantage of the new adviser relationships, FY20 and FY21 forecasts are reduced by -16% and -11% respectively.
Credit Suisse is supportive of management's decision to invest in the business and believes the platform will attract significant flows in coming years. This should translate to margin expansion and high growth in earnings per share. Volatility, however, is likely to continue in the near term, the broker adds.
Wilsons observes market share is clearly accelerating, although this is bringing forward some of the assumed growth in costs. The contraction in operating earnings (EBITDA) margins, despite top-line growth, reflects investment in distribution, compliance and finance, and more of this investment is expected in FY20.
Funds Under Administration (FUA) guidance has been lifted 14% to $22-26bn for FY21 and this higher guidance is supported primarily by the existing client base, the broker notes. On balance, Wilsons retains a target and valuation of $9.48. Not one of the seven monitored daily on the FNArena database, the broker continues to be concerned around near-term risks to cash management earnings and maintains a Sell rating.
There were both temporary and enduring pressures on margins over FY19, Ord Minnett acknowledges but retains a view that higher growth in FUA will come at the cost of margin, not revenue dollars. Hence, short-term pain should be outweighed by the long-term gain, and the broker sustains a Buy rating, believing there is a significant opportunity for investors.
Broker views run the gamut. Macquarie is at the other end of the spectrum, suspecting consensus margin forecasts are too high and maintaining an Underperform rating, while suggesting net flows will be weighted to FY21.
Citi estimates net flows provided a solid start to the year over the first eight weeks of FY20, especially given the lack of transition flows, and assumes 44% growth in underlying net flows. The broker upgrades to Neutral from Sell, given the improving outlook for net flows, although continues to envisage downside risks to platform pricing from a lower rate environment.
Morgans is also attracted to the embedded growth within the business and the long-term profile but, tactically, agrees the share price is susceptible to concerns about how the sector will manage lower cash rates.
All About Margins
Wilsons continues to model a gradual decline in revenue margins, driven by increasing average account balances and pricing tension. Assumptions do not incorporate larger client wins which would increase the rate of decline.
Revenue margins declined -6.5 basis points in FY19. Macquarie found little visibility on revenue margins was provided by HUB24 and factors in another decline of -7.3 basis points over the next two years.
The counter argument, that FUA flows are strong, has been made, but the broker dismisses this, suspecting the required rate of investment will mean expectations are not met, while revenue margins and earnings have been consistently weaker than forward estimates.
Macquarie assesses estimates for revenue margins have, historically, been too bullish and remain too high. Lower interest rates will also lead to higher platform costs for the account holder.
Citi forecasts revenue margins to decline by -7 basis points, to 44 basis points by FY21, reflecting a skew to new clients with higher balances, a reduction in cash margins assuming an official cash rate of 0.5% and increased focus by advisers on the overall platform fee.
Operating earnings margins are expected to expand by 420 basis points, with platform cost growth slowing to 25% FY20, yet Citi envisages downside risk to these margins over the medium term as costs weigh. HUB24 is also relatively more exposed to a further -25 basis points reduction in the cash rate as, the broker asserts, some clients are receiving a cash management rate closer to 25 basis points.
There is one Buy rating (Ord Minnett), three Hold and one Sell (Macquarie) on FNArena's database. The consensus target is $12.44, signalling 6.4% upside to the last share price. Targets range from $8.72 (Macquarie) to $15.48 (Ord Minnett).
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