Australia | Apr 08 2020
HUB24 has experienced significant growth in funds on its platform. To what extent are prospects shaped by expectations of a sharp rebound in markets after the crisis has passed?
-Fund flows are expected to slow in the June quarter
-Well-placed to benefit from the changing financial advice environment
-Positive outlook predicated on a V-shaped recovery in the market
By Eva Brocklehurst
Most brokers consider HUB24 ((HUB)) an attractive investment as the business continues to disrupt the wealth management sector. The company has experienced significant growth in funds under administration and remains profitable.
However, competitive pressures are mounting in the wealth management platform industry and revenue margins are expected to continue to come under fire. March quarter funds under administration were down -5%, affected by negative markets.
Yet, flows were incredibly strong, Credit Suisse points out, up 70%. Flows are expected to slow in the June quarter, which is not a surprise to the broker, as financial advisers are likely to focus on servicing clients rather than switching platforms.
The slowdown is expected to be short lived and a re-acceleration in flows should take hold. The broker also expects HUB24 will continue to gain market share as a result of its leading product.
Shaw and Partners observes the HUB24 platform continues to expand at the fastest rate in the industry and the company has a history of beating targets. HUB24's market share expanded to 1.6% as of September 30 2019.
Revenue is sourced from cash margins and platform administration fees. There are also several other associated sources of fees such as insurance commissions and managed fund transactions. The broker expects the revenue composition for the whole sector will move away from administration fees in favour of cash margins and brokerage.
The recent cuts to record lows for the official cash rate means Shaw assumes all customer cash balances are on zero margins. Margins are also forecasts to contract to less than 40 basis points over the next 3-4 years because of intense competition, which the broker believes the market has priced in.
The platform obtains access to wholesale brokerage rates and charges the client between 10-20 basis points. Shaw expects this margin will be largely sustainable, as brokerage rates have already been compressed significantly since the GFC.
While over the short term trading revenues and asset mix will soften the revenue and earnings impact of weak markets, Macquarie points out, in uncertain times, there is a negative carry on cash accounts as more cash is held.
Therefore, a high percentage of client assets are in low-risk assets which “lose money”. Given a base case for an economic recession, Macquarie believes growth will be challenging and envisages further market declines and softer front book flows.
There is also a higher risk of retail withdrawals from platforms, with voluntary tax-free superannuation withdrawals likely to create increased outflows. Nevertheless, Shaw considers the changing regulatory environment for financial advice and shifting industry dynamics bode well for HUB24.