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 and Improved Financial Performance: HUB24 Limited (ASX: HUB) provides investment and superannuation portfolio administration services. The company also offers licensee services to financial advisers through Paragem Pty Ltd and application and technology products through Agility Applications Pty Ltd. As on 25 February 2020, the market capitalisation of the company stood at ~$670.57 million. In the Annual General Meeting, the top management stated that the company delivered shareholder returns, improved financial performance and superior client outcomes in FY19. During FY19, group revenue went up by 15% to $96 million and platform revenue increased by 36% to $54 million. The company continued to maintain its growth trajectory and reported an increase in underlying EBITDA (earnings before interest, tax, depreciation and amortisation) by 30% to $14.8 million. Increase in EBITDA resulted in NPAT growth of 27% to $6.8 million. At the same time span, HUB was successful in maintaining its position as the fastest growing platform provider in Australia with an increase in Funds Under Administration (FUA) by 54% to $12.9 billion. The company also witnessed compound annual growth rate (CAGR) of 76% in Platform revenue over the past five years and demonstrated a record growth of 94% in net flows of FUA to $1.2 billion in the first quarter of FY20. Growth of the company is well distributed across 256 active licensees with 84 new agreements signed in FY19. The decent financial and operational performance enabled the Board to declare an unfranked final dividend of 2.6 cents, bringing the total dividend for FY19 to 4.6 cents, up by 31% on pcp. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 35.07% in revenue and a CAGR of 65.11% in gross profit. 

The company has recently released its interim results for the period ended 31 December 2019, wherein it witnessed opening of approved product lists to Specialist Platform Providers. The company is well positioned to help advisers adjust and define their value proposition in a post Royal Commission world. During 1HFY20, the company continued its growth momentum and reported record net inflows from new and existing clients and increased the market share to 1.6% as at 30 September 2019.

The company is focusing on growth and has ensured momentum in a dynamic market. It has maintained its number 1 position in Managed Accounts for three consecutive years. With ongoing growth in funds under management, the company expects its financial results to continue to improve with scale. During FY19, the company secured new opportunities and has built bulk FUA migration capabilities to support large scale platform transitions and migrations. 


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of HUB24 Limited. TIGA Trading Pty Ltd is the largest shareholder in the company, with a percentage holding of 11.72%. 


Top 10 Shareholders (Source: Thomson Reuters)

Cost Management and Financially Stable Balance Sheet: During FY19, gross margin of the company witnessed an improvement over the previous year and stood at 59.1%, up from 53.2% in FY18. This indicates that the company is managing its cost well and is able to convert its top line into the bottom line. In the same time span, EBITDA margin was 14% as compared to 11.6% in FY18, indicating more profitable operations of the company. During FY19, Return on Equity of the company stood at 11.7%, higher than the industry median of 6.3%. This indicates that the company is well deploying the capital of its shareholders and is capable of generating profits internally. In the same time span, current ratio of the company was 3.09x as compared to the industry median of 1.45x. This implies that the company is liquid enough to pay off its current liabilities using its current assets. During the year, assets/equity ratio of the company was 1.19x as compared to the industry median of 4.24x. This implies that the business is financed with a larger proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Thomson Reuters)

Key Operating Segments: The company operates through financial advisers authorised by Paragem Pty Limited and provides application and technology products through Agility Applications Pty Limited. During 1H20, the Paragem team has recruited 12 new advice practices to accelerate the migration of advisers away from institutional licensees. In the same time, HUB’s Agility business has extended the product capability and has announced an agreement with Cashwerkz to integrate their term deposit and cash management platform. 

The company recognises its revenue from Platform fees, Licensee fees, IT Service fees and Interest income. The Platform segment provides investment and superannuation platform services to financial advisers. During 1H20, the company reported an increase of 38% in revenue generated from platform fees, which stood at $35 million with underlying EBITDA of $13.8 million, up by 73% on pcp. The second business segment, Licensee, provides compliance, software, education and business support to adviser practices. During 1H20, revenue from the licensee fees went down to $14.58 million from $18.27 million in 1H19. The IT service segment of the company provides technology products for the financial services sector and generated a revenue of $3.06 million in 1H20, which is broadly in line with the revenue generated in 1H19.

HUB24 Reports Record First Half: The company announced its results for the half year ended 31 December 2020 wherein it reported an increase of 12% in operating revenues to $52.7 million, up from $47.1 million for 1HFY19. The group recorded a 75% increase on 1HFY19 in group underlying net profit after tax, that came in at $5.4 million and a growth of 71% in underlying group EBITDA to $11.7 million. In the same time span, the company reported record net inflows of $2.5 billion, up by 18% on 1HFY19. HUB’s leading technology, product leadership and customer focus have resulted in steady growth and new business opportunities.

During 1H20, FUA stood at $15.8 billion, up by 58% on 1H19. In the same time span, platform revenue increased by 38% to $35.0 million and outpaced the increase in platform expenses of 22% to $21.2 million. This increase in platform revenue was impacted by strong flows from licensees with large Funds Under Advice, which resulted in access to competitive pricing, as well as lower cash balances on the platform. The decent financial performance of the company enabled the Board to declare an unfranked interim dividend of 3.5 cents per share, reflecting an increase of 75% on 1HFY19. 

 
1H20 Financial Metrics (Source: Company Reports)

Future Expectations and Growth Opportunities: The Wealth Management industry of Australia is now taking shape, and HUB24 Limited is well positioned with its products and technology to benefit from the tailwinds and opportunities for further growth. The company has increased its staff to grow its capability for distribution and hence is targeting FUA in the range of $22 to $26 billion by 30 June 2021. HUB is strategising to leverage industry trends and is focused on delivering on its key objectives. 

HUB is leveraging its existing advisers and licensee opportunity, which will help the company to accelerate growth in market share. The company is working on converting new opportunities from a strong pipeline and is expecting benefits from investment in the distribution team in 2H20 and beyond. HUB is anticipating substantial growth in financial results and expects to deliver higher shareholder value in the upcoming years.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Based Relative Valuation

EV/Sales Based Relative Valuation (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 is trading very close to its 52-weeks low level of $9.890, proffering a decent opportunity for accumulation. The company is strengthening Paragem value proposition and is utilising AI to prototype advice delivery tools. The company has also launched a new investor app, which offers customer personalisation and data sharing. This is expected to unlock value for customers through technology and product innovation. Thus, considering the trading levels, decent financial performance, improvement in key margins and a modest outlook, we have valued the stock using EV/Sales based relative valuation approach and have arrived at a target price offering an upside of lower double-digit (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $10.430, down by 2.249% on 25 February 2020. 

 
HUB Daily Technical Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.