Australia | Oct 14 2020
This story features HUB24 LIMITED. For more info SHARE ANALYSIS: HUB
Hub24 continues to sustain significant momentum, enabling the wealth management business to withstand the pressures on the industry.
-Significant momentum envisaged in the stock
-Platform margins still under pressure but understood
-A cut to the cash rate would be a headwind
By Eva Brocklehurst
A ongoing stellar performance for Hub24 ((HUB)) is reflected in robust quarterly funds under administration (FUA) data and a steady rise in adviser numbers. The company also signed 27 new licensee agreements during the September quarter.
Hub reported funds under administration of $19bn in the first quarter, up 10.4% from the prior quarter and driven by positive net inflows of $1.4bn as well as positive market movements.
Credit Suisse notes the quarter did not seem to include any lumpy transitions, although the $1.3bn Clearview transition is still to come, and expects HUB24 will slightly exceed the top end of its funds under administration target of $28-32bn in FY22. Hub flagged the bulk of the transition of Clearview is on track to be completed in FY21.
Shaw and Partners welcomes the numbers, given the concerns regarding the impact of the pandemic. The increase in FUA was driven by client transition from incumbent platforms as well as new clients.
Momentum is key and the broker assesses Hub has plenty, amid strong double-digit profit growth in a tough industry. The company also boasts strong and attractive forward returns on equity of 15%, return on invested capital of 20% and operating earnings (EBITDA) margins approaching 25%.
While platform margins remain under pressure, Macquarie considers this well understood. Pressures are coming from the pricing differential between the front and back books as a majority of industry participants have announced re-pricing measures over the past two years. Also, as trading volumes were elevated in the second half of FY20 because of heightened volatility, a normalisation to trend is expected in FY21.
The recent performance of the business suggests the valuation is stretched but Macquarie expects sustained flow momentum will support the share price over the remainder of FY21 and upgrades to Neutral from Underperform.
The broker also raises the target to $22.50 from $9.60 because of the compounding impact of upgrades to earnings per share in outer years, a higher terminal growth rate and lower discount rate.
Goldman Sachs remains positive on the medium-term structural opportunities for emerging wealth platforms and updates estimates to reflect both the recent results and the trends in the first quarter. Estimates for earnings per share are raised by 3.2% for FY21 and 2.2% for FY22.
While a weak macro economic outlook could negatively affect flows, Citi envisages upside risks to forecasts. The share price may have had a strong run but the broker believes there is potential for a further positive reaction to this better-than-expected start to the year.
While acknowledging Hub is making the most of the unique opportunity created by disruption in wealth management and capturing significant flows, Credit Suisse believes current multiples do not account for the emerging risk of a cash administration fee reduction should the Reserve Bank of Australia cut interest rates even further.
Credit Suisse estimates if the RBA were to cut the cash rate to 10 basis points this would affect FY22 earnings by -12%, and if the cash rate became zero it would reduce earnings by -20%. Hence, the broker reiterates an Underperform rating.
Hub has indicated it will absorb any future cuts to the cash rate, as occurred during the recent -25 basis points reduction and Macquarie incorporates a -15 basis points reduction to the cash rate in November, estimated to reduce revenue by around -$2-3m on an annualised basis.
Citi agrees a further reduction in the cash rate will be a headwind and envisages -8% downside to FY21 net profit forecasts if the cash rate is reduced by -15 basis points. The revenue margin is also expected to be negatively affected by lower cash balances trading activity.
Among those stockbrokers not monitored daily on the FNArena database, Shaw and Partners has a Buy rating and $22 target while Goldman Sachs, also rating the stock Buy, increases the target to $23.20 from $15.80.There are two Buy ratings, two Hold and one Sell (Credit Suisse) on the database. The consensus target is $19.27, signalling -12.0% downside to the last share price. Targets range from $17.55 (Citi) to $22.50 (Macquarie).
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