Company Overview: HUB24 Limited is a financial services company. The Company is engaged in providing investment and superannuation portfolio administration services, and licensee services. It operates the HUB24 investment and superannuation platform. Its segments include Platform, Licensee and Corporate. The Platform segment is engaged in the development and provision of investment and superannuation platform services to financial advisors, stockbrokers, accountants and their clients. The Licensee Services segment provides financial advice to clients through financial advisors. The Licensee Services segment provides compliance, software, education and business support to advisor practices enabling advisors to provide clients with financial advice over a range of products. The Corporate segment provides corporate services to other segments. Its platform offers a range of investment options for various types of investors, such as individuals, companies, trusts, associations or self-managed super funds.
 

HUB Details

Record Growth in Net Inflows: HUB24 Limited (ASX: HUB) provides investment and superannuation portfolio administration services, provision of licensee services to financial advisers and software license and IT consulting services. As on 7^th January 2020, the market capitalisation of the company stood at ~$681.97 million. The company continued to benefit as a result of growing FUA (Funds Under Administration) by 54% to $12.9 billion and increasing group revenue by 15% to $96 million. During FY19, the company managed to maintain its position as the fastest growing platform provider in Australia with a compound annual growth rate (CAGR) of 76% in platform revenue over the past five years. The company is in good position to benefit from the future prospects and this has been demonstrated by the record growth in the first quarter of FY20, with net inflows of FUA of $1.2 billion, representing an increase of 94% on the prior corresponding quarter, almost double the level of the first quarter of FY19. HUB24 has delivered on its growth plans and the strong financial performance has supported the payment of an interim dividend of 2 cents paid in April and a final dividend of 2.6 cents paid in October, and, resultantly, the total unfranked dividend for the year comes out to 4.6 cents, up by 31% on the pcp. In the recently held Annual General Meeting, the top management of the company addressed its shareholders and stated that the growth of the company is scattered across 256 active licensees, with 84 new agreements signed in FY19 along with 1,625 advisers. 

The company also gave evidence of its technology capability and experience in managing complex transitions along with maintaining momentum across its business by bringing a large transition across Fitzpatrick’s Private Wealth in-house MDA ahead of schedule. The company is increasing its market opportunity with the Australian wealth management industry taking shape and is focusing on delivering results from its market position, FUA growth and industry recognition. For the year ended June 30, 2019, underlying Platform EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) increased by 52% to $18 million and statutory NPAT (Net Profit After Tax) of the company stood at $7.2 million. The company expects to leverage the success of FY19 to service and convert its existing adviser and licensee opportunity. 

It is also expecting to create new portfolio capabilities and attract new investment managers to support product innovation and attract additional flows. HUB24 Limited maintained its position as market leader in the managed accounts segment. The segment has been growing as advisers recognise the tangible benefits which managed accounts provide in terms of client outcomes and business efficiencies. It is forecasted to reach $115 billion by 2020.


Financial Highlights (Source: Company Reports)

Top 10 Shareholders: The following table provides a broader overview of the top 10 shareholders in HUB24 Limited.  


Top 10 Shareholders (Source: Thomson Reuters)

Decent Position of Key Margins: During FY19, gross margin of the company witnessed an improvement on the past year and stood at 59.1%, up from 53.2% in FY18. In FY 2019, EBITDA margin of the company stood at 14% relative to 11.6% in FY18, implying stability in earnings. Notably, Return on Equity of the company was 11.7%, higher than the industry median of 6.2%. This implies that the company has been delivering decent returns to its shareholders.

Current ratio of the company, during the year, was 3.09x, higher than the industry median of 1.45x, indicating that the company is liquid enough to pay off its current liabilities using its current assets. The company also reported financial stability in its balance sheet with Debt/ Equity ratio of 0.01x, lower than the industry median of 0.47x. 


Key Metrics (Source: Thomson Reuters)

Continued Progress in Q1 FY20: The company has recently declared its results for the first quarter of FY20 and stood at 2^nd place for its annual & quarterly net inflows. The company stated that funds under administration went up by 57% on pcp to $14.4 billion, reflecting the quality of HUB24’s products and customer service with gross inflows of $1,673 million. The increase in FUA was mainly due to inflows from a mixture of existing and new adviser relationships, and at the same time, the structural change across the industry is providing opportunities for assisted transitions of FUA from competitor platforms.

There has been a strong start to FY20 with average monthly inflows of $413 million, ahead of the FY19 average of $324 million per month which included a significant client transition. The company has been witnessing a strong demand for Investor Directed Portfolio Service (IDPS) and Super product including the continued demand for managed accounts. During Q1 FY 2020, the company signed 22 new licensee agreements and 80 new advisers began to use the HUB24 platform.


Key Statistics (Source: Company Reports)

Leading Change in Wealth Management: The company has been delivering returns to shareholders, improvement in its financial performance and superior client outcomes. The company focuses on growing and developing its wholly owned subsidiary Paragem Pty Ltd and it was stated that refreshed strategy and broadened offer which includes the development of a new community program has been helping growth, retention and innovation.

New Licensee Relationships: The company has successfully secured new licensee relationships during FY19 and plans to invest in additional distribution staff to leverage exceptional market opportunities for increasing growth. The company’s opportunities’ pipeline has been growing and it has signed 20 new agreements during Q1 FY 2020 including large boutiques licensees, brokers, self-licensed and advisers operating within an aggregator model. In another release, the company announced that Mark Goodrick has resigned from the position of Chief Financial Officer and Joint Company Secretary.

What to Expect from HUB Going Forward: HUB24 continued to innovate, and has been launching foreign currency capabilities and providing additional flexibility for licensees as well as investment managers to work with the range of third-party Responsible Entities in order to deliver Managed Investment Scheme (or MIS) portfolios to their clients through platform. The company is also continuing to build ConnectHUB. It provides seamless integration of data from external providers and it has been leveraged to add annuities to the platform as well as to deliver new historical performance reporting, with an aim to remove a significant barrier to changing platforms for advisers and their clients.

The company intends to grow its distribution footprint nationally, by recruiting roughly 8 new staff to take benefits of the large growth opportunity. It also plans to extend its leadership in Managed Portfolios by investing in an additional IT scrum team, which is expected to deliver innovative solutions, providing enhanced accessibility and outcomes for clients. The company anticipated its FUA to range in between $22 billion to $26 billion by the end of FY21, upgraded from $19 billion - $23 billion. The new licensee agreements provide access to approximately 1,400 new advisers and the company has built bulk migration capabilities to support large scale platform transitions and migrations.
HUB expects to accelerate growth in market share and anticipates to increase its FUA with the help of transitions and growth in organic inflows. It also expects to avail full benefits in FY21 and beyond.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price/ Book Multiple Approach

Price/Book Multiple Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of HUB gave a return of 5.64% in the last one month. The stock is trading close to its 52-week low level of $9.890, proffering a decent opportunity for accumulation. In the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 65.11% in gross profit and a CAGR of approximately 28.91% in total assets. The company continues to take up market opportunities and delivered scale benefits with investment in innovation and growth whilst controlling expenses.

Considering the returns, trading levels, CAGR in gross profit and total assets, improving margins and promising outlook, we valued the company using Price/Book Based Relative valuation approach, and for the said purposes, we have considered peers like Netwealth Group Ltd (ASX: NWL), Pinnacle Investment Management Group Ltd (ASX: PNI), Magellan Financial Group Ltd (ASX: MFG) and Pacific Current Group Ltd (ASX: PAC). And, we have arrived at a target price of lower double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of A$10.990 per share, up by 1.197% on January 7, 2020.


HUB Daily Technical Chart (Source: Thomson Reuters)

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