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Margins Give Hub24 An Edge on Competitors

Australia | Feb 28 2022

Sustained growth in inflows will be needed for Hub24 to achieve its sizeable two-year funds under administration target increase, following a record result in the first half.

-Hub24 upgrades its two-year funds under administration target following the first half
-First half earnings delivered a 16% beat to consensus forecasts on the back of margin strength
-The platform was the only one in its segment to report margins growth in the half

By Danielle Austin

Hub24 ((HUB24)) has outlined big plans to almost double funds under administration (FUM) over the next two years, following the release of the company’s first half results. The investment and superannuation platform provider issued an upgrade to its FUM outlook, now targeting $83-92bn by FY24 compared to a previous target of $63-70bn by FY23.

The target update, which implies the company expects to achieve as much as $14bn in annual inflows over the next two years, comes off the back of a record inflow result in the half of $6.7bn.

The company delivered a strong first half result, including an earnings beat of 16% on consensus forecasts with reported earnings totalling $29.7m and implying 76% year-on-year growth. Net profit of $14.2m implied 80% year-on-year growth.

Flows have slowed in the early second half, and inflows of around $1.3bn reported year-to-date were largely offset by market movements. FUM of $49.9bn reported in mid-February are almost flat on the $50.0bn reported at the end of 2021, but January is seasonally slower.

Segment outlier given margin growth

The positive first half result was driven by sustained strength in margins. The company’s platform earnings margins increased to 38.8% from 35.8% in the previous half, with a platform revenue margin of 30%. The result is notable given cost-impacted competitors suffered margin declines during the half, with Hub24 the only specialist platform to report margin growth.  

Employee expenses were the largest area of operating expenditure growth in the half, with 64% growth in employees driving employee expenses to $13.9m. However, analysts largely agree that securing talent in a competitive labour market and inflating wage environment is largely a positive for Hub24, and key to future growth.

Outlook for seasonal momentum and acquisition synergies

As the company moves out of a seasonally slower period, momentum is expected to pick up, with acceleration key to the company delivering on targets. Expect momentum to continue to grow into the fourth quarter.

Delivery of acquisition synergies will also support the company’s outlook. The acquisition of self-managed super fund technology provider Class has completed, and the company has suggested upside risk to its initial estimate for the merger to provide 8% accretion to earnings per share.

Of the brokers in the FNArena’s database covering Hub24, all five have Buy (or an equivalent) ratings with an average target price of $34.11 implying 26.3% upside to the last closing price.

Among brokers outside FNArena's daily coverage, Shaw and Partners, retaining a Buy rating with a $38.00 target, is conservative on Hub24’s updated FUM guidance range given market volatility, and upgraded its forecast in line with the lower end of guidance at $84.3bn. However, the broker also noted the typically conservative management, and some exclusions from the estimate, make upside likely.

Hub24 remains Barrenjoey’s specialist platform segment pick, and the broker retained its Overweight rating with the highest target price in its coverage at $39.05. According to Barrenjoey, Hub24 appears more likely to continue to deliver earnings margin expansion upside compared to peers while the Class acquisition offers significant medium-term opportunity.

Jarden upgraded to an Overweight rating from Neutral but issued a target price decrease to $28.55. With guidance suggesting confidence in strong sustained growth, Jarden forecasts 25% platform revenue compound annual growth and funds under administration at the top end of guidance of $90bn by FY24, while margins could increase to around 40%.

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