Hub24 Making Its Mark

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While inflows are slowing for Hub24, they are not slowing as fast as for peers, and brokers agree digital investment platforms are the future.

-Quarterly increase in funds under management, but inflows slow
-Adviser movements slowing
-Big injection from EQT Holdings
-Hub24 ticks the boxes

By Greg Peel

Funds management digital platform Hub24 ((HUB)) reported funds under administration (FUA) at the end of the March quarter of $59.4bn, up 6.5% from the December quarter and up 16.5% year on year. The increase is split into $1.9bn of net funds inflows and a $1.7bn gain on the positive stock market movement over the period.

These results are mostly a little below broker forecasts, or closer to in line once the market movement is added.

However, platform net inflows of $1.9bn are down -33% from the prior quarter and -29% year on year. FY23 net inflows to date are down -17.6% year on year.

Again, analysts are not fussed, as such weakness is in line with an industry-wide trend reflecting uncertain and volatile markets over the period. The ASX200 ran up 8.8% from the beginning of January to early February, then gave it all back by the end of March, with the month of March impacted by the Silicon Valley Bank scare.

The other factor is an easing in the pace of adviser movements across the industry, as the disruption of the digital platforms to legacy funds managers begins to mature. A new adviser to a platform is inclined to bang his or her gong, and get some investments happening, in order to establish themselves. Fewer adviser additions mean less investment churn.

While Hub24 suffered lower net inflows in the quarter, it still rated best in losing -29% year on year compared to rivals Netwealth Group ((NWL)), down -37%, and Praemium ((PPS)), down -50%.

Shaw and Partners expects gross outflows to decelerate over the coming quarters as market volatility has dissipated and a level of consumer confidence returns. The broker does not qualify this view in its note on Hub24, thus one might query lower volatility in the face of likely further central bank rate hikes, and ditto consumer confidence on that front. Perhaps the resolution of the US banking crisis is one reason, if that crisis has truly been resolved.

However, Shaw’s thesis that independent platforms, and in particular Hub24, will dominate the investment administration space into the long term remains intact. Superannuation net inflows continue to be a highlight.

Jarden agrees Hub24 is benefiting from a greater superannuation FUA mix where flows remain "strong" compared to a softening in more discretionary Investor Directed Portfolio Services flows. The broker notes Hub24's more resilient trends are what helped in outpacing Netwealth for a third consecutive quarter.

Adviser Additions

Hub24 added 56 new advisers in the March quarter, up from 53 in the prior quarter, but well below the 115 per quarter average, Citi notes, of the last five years. As suggested, this is no reflection on the platform itself, rather the trend across the industry as the great adviser diaspora abates.

Hence the numbers are, again, of no concern to brokers.

Hub24 signed 27 new agreements in the quarter, which is up slightly from 26 in prior quarter, and in line with the average over the last three years. This is positive for adviser growth and flows in the future, Citi points out.

Big Funds Injection

The highlight of the market update was the announced heads of agreement to provide custodial platform administration and technology solutions for EQT Holdings ((EQT)) and Australian Executor Trust trustee services clients. EQT acquired AET last year.

Under the deal an initial $4bn of institutional FUA is expected to be transitioned in several tranches over an 18-month period to Hub24, with brokers expecting the bulk to be in FY24.

This is the Big Deal brokers have been awaiting for the past six months. It is due to this deal Hub24 has retained its FY24 custodial FUA target of $80-89m. On this point nevertheless, brokers are not so sure.

Brokers do agree, with no detail as yet provided, the fees charged by Hub24 will end up somewhere between the 16 basis points it charges the previously smaller segment of institutional clients and the 41bps it charges retail clients, and likely exceed 20bps.

But as far as reaching the FUA target, Jarden suggests this now looks “increasingly achievable” while Morgans believes it “looks a stretch”.

Shaw questions whether there are further large transitions to come, considering the reiterated FUA target requires a sustained contribution in net flows to meet even the lower end of the range. That said, perennial underperformance of some of the incumbent platforms in the near past contrasts to Hub24 achieving number one platform across all categories, the broker suggests, which should see further large additions to the group over time.

While Hub24 is not impervious to industry headwinds, UBS considers the flows outlook in the mid-long term to be driven by lifting the platform's low penetration. It is therefore a secular growth opportunity within management control. The platform's FUA market share remains low at 5.4%, and 26% of advisers joined only in the past two years.

Backing the Winner

While brokers have highlighted lower net inflows to digital platforms in recent months, the reality is traditional fund managers are mostly struggling to stem the tide of outflows. AMP is a case in point from the past, and more recently Magellan Financial has had issues, for example.

Meanwhile, the digital platforms continue to grow, from a low starting point.

“We remain firm believers of the structural change within the platforms sector,” says Ord Minnett, “of which Hub should be a major beneficiary. We regard Hub as our top pick in the platforms sector, with a superior relative flow performance, higher expected [earnings] growth and appealing valuation metrics”.

“We expect Hub to continue to entrench a market leading position (along with Netwealth) in the platform sector,” says Morgans, "which is a key attraction. Hub’s longer-term play in integrating other parts of the value chain is likely to deliver diversification, long-term client relevance and additional value in time”.

“Hub is achieving sector leading net flows,” says Shaw, “ranked number one platform in all seven categories including best overall platform, is delivering operating leverage and winning large transitions. Our thesis remains that Hub will continue to dominate the platform segment over the medium to long term."

“We continue to prefer Netwealth,” says Macquarie. Well there had to be one. Macquarie nevertheless has an Outperform rating on both.

There are five Buy or equivalent ratings on Hub24 among six covering brokers in the FNArena database. Citi is on Neutral. The consensus target is $33.23, currently suggesting 18% upside.

Jarden, not monitored daily, cites “lingering uncertainty around retail flow momentum despite higher markets,” and retains Neutral with a $28.50 target, below the lowest of the database brokers. Shaw and Partners stands out with a $38.00 target.

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