HUB24 – Can the growth continue?

Following a tough 3Q23 for platform flows we share our thoughts on a Surrey Australian Equities Fund (SAEF) holding HUB24 (HUB.ASX). HUB is a financial services company, that provides integrated platform, technology, and data solutions to the Australian wealth industry.

A key to the company’s earnings growth is the expansion of Funds Under Administration (FUA) on its platforms which is generated from net fund inflows as well as movements in the stock market. Net fund inflows come from growth in advisers using its platform and penetration of those advisers. HUB has been steadily increasing its share of advisers as demonstrated below. We believe much of this is due to its reinvestment in technology/product.

Source: HUB24

Net fund growth has historically been strong as the company takes market share. However, recent stock market jitters have seen this growth slow to some degree. Not surprisingly given the market backdrop 3Q23 net fund flows were the softest quarter for the company since 2Q21. Despite the challenging macro headwinds it has faced, HUB still maintains that according to Plan For Life data, it ranks first in the industry for quarterly and annual net inflows and as of December 2022 had a market share of 5.85% up from 4.9% in the pcp. We also note that while rising interest rates have seen the Australian stock market stall and some pockets fall dramatically, we estimate HUB’s earnings to typically benefit from higher rates on cash balances.

Source: HUB24

Some other ex-100 listed “financial platform style” companies with exposure to FUA/market conditions:

HUB has various peers it competes against who are listed on the ASX with Netwealth (NWL.ASX) being its most closely regarded comparative. HUB has lagged NWL in terms of share price performance Calendar Year To Date. This is potentially a consequence of HUB’s acquisition of myprosperity for an upfront payment of $40m in HUB shares (deal completed on May 30th this year. Given it is not forecast to be EPS accretive until FY27 the market appears to be taking a wait-and-see approach to its integration.

The table below highlights some ex-100 ASX-listed “platform” style companies that have direct earnings exposure to growth in Funds Under Management/Advice. Interestingly higher beta stocks MA Financial Group (MAF.ASX), Netwealth (NWL.ASX), and Pinnacle (PNI.ASX) have been strong performers this calendar year. After sharp sell-offs during 2022 and some of 2023 they are moving well ahead of both the All Ordinaries Index and the Small Ordinaries Index. Despite continuing to grow its FUA, HUB so far has trailed the appreciation of both these Indexes this year.

Source: Iress

What is Surrey Asset Management looking for from HUB?

We have forecast continued growth in FUA although risks both to the upside and downside always exist with regard to the competitive environment and market conditions. Our growth also sees benefits to HUB from the Heads of Agreement with Equity Trustees Limited (EQT) which should see it providing custodial platform administration and technology solutions for EQT and AET trustee services clients.

Source: Surrey Asset Management

The company based on Surrey Asset Management’s forecast is now trading on a FY24 estimated P/E of ~29x with our corresponding targeted earnings growth of 20%+. While not cheap on that metric alone we believe our estimates and the potential for upside related to the company's medium-term operating leverage justifies our investment and we look forward to measuring the company’s progress when it releases its June Quarterly fund flow update.