Thursday, November 22nd, 2018
HUB24 (ASX code: HUB) is a provider of one of the leading independent wealth management platforms in Australia. The platform is used by financial advisers to administer client funds across a range of investment products, including managed accounts, managed funds, direct equities, fixed interest and cash. Advisers can use the platform to efficiently direct investments for a large number of individual clients and to produce individual reports for these clients.
What makes HUB24 interesting as an investment?
HUB24 is one of a small group of independent platform providers, which have only a 6% market share of the Australian platform industry but are collectively winning 67% of industry net inflows, as illustrated below. HUB24 itself currently has a 1% market share, but in the year to June 2018 won a remarkable 18% of industry net inflows. This makes HUB24 the fastest growing platform in percentage terms in Australia.
This growth is being supported by two key factors. Firstly, the independent or Specialist Platform Providers have invested in innovative technology and have been responsive to the demands of their client base. In the annual Investment Trends Planner Technology survey, HUB24 consistently ranks in the top 3 platforms across a range of metrics. Advisers using the platform have the lowest intention to change platform compared to all other platforms.
Secondly, advisers are increasingly moving to independence from large institutions, opening up the choice of which platform they use and this change has been accelerated by the Royal Commission. Along these lines, institutionally owned dealer groups are also opening up their APL’s to competing platform providers. If grandfathered product commissions are abolished, this would be expected to provide a further impetus for advisers to reconsider their choice of platform provider.
What is the company worth?
For a company with very strong long-term growth, a preferred valuation method is often discounted cash flows. One year ago, HUB24 management provided a three-year target to achieve funds under administration of $12 billion. With the result in August 2018, a new three-year target was provided for between $19-23 billion, compared to $8.3 billion as at FY2018. This is both a strong indication of the momentum in the business as well as a useful guideline for forecasts. The target is consistent with the share of industry flows which the business has recently been winning. Additionally, the company’s profit margins are expanding rapidly from a low base, having achieved a maiden profit in FY2017. Industry peers Netwealth and IOOF both generate net profit relative to funds under administration of approximately 0.20%. It is reasonable to assume that HUB24 will achieve a similar level of profitability as it approaches Netwealth’s current scale in three years’ time. Using these parameters as the basis for our forecasts, we derive a one-year forward price target for HUB24 of $14.60, which compares to the current price of $12.96.
Clime owns shares in HUB.