Hot Stock - HUB24 (HUB.ASX)

Monday 20th July 2015

Underlying positive earnings sustained through 4Q15

What’s new?

HUB24 announced in late May that it has increased the functionality of its online product and services capability. While HUB24 has not disclosed the cost of the initiative, the rationale for upgrading its online platform to include self-directed investors seems logical. This is particularly given that self-directed investors (i.e. such as self-managed super funds) remain one of the fastest growing segments of the Australian superannuation market.

Despite the compliance obligations and complexities for an individual or trust operating a self-managed super fund, they are proving to be very popular. According to the ATO, self-managed super funds are the fastest growing fund type in Australia, with 529,396 registered funds representing 1,002,485 members as at 30 June 2014 – by 31 December 2014 this number had increased to 545,334 registered funds with 1,034,497 members.

There are a number of reasons why individuals or trusts will prefer a self-managed super fund over standard third-party options. However, based on the results from the ATO’s 2008 new trustee questionnaire, there were two key reasons for the survey’s respondents establishing an SMSF. These are, perhaps not surprisingly, having control over their investments and greater flexibility over their investment options.

Encouragingly for investors in HUB24 (and not unlike other platform providers such as Praemium and OneVue), the recent extension of the company’s online platform is essentially in recognition of the growing popularity of self-directed investments. Commenting on HUB24’s initiative, management stated that “we are increasingly finding advisers are seeking more collaborative approaches to service their clients”.

Moving on to HUB24’s subsequent 4Q15 inflows report, we note that the company reported another record quarterly net inflow. Encouragingly for investors, all of HUB24’s key quarterly metrics have continued to improve, with the company’s (i) funds under advice up 100 percent on the previous corresponding period to $1.7 billion, and (ii) net quarterly inflows to the investment and superannuation platform up 131 percent on the previous corresponding period to $273 million.

While the growth in HUB24’s funds under administration has been positive to date, the key for investors is how this translates to profit. On this front HUB24 remains awork in progress, with the marked increase to date in funds under administration having been insufficient to offset the continued investment in the company’s operating capabilities. That said, HUB24’s 4Q15 report does provide some insights about the company’s underlying profitability.

As per the 4Q15 release, management has stated that “monthly operating (i.e. operating EBITDA from continuing businesses and excluding growth operating expenditures and other significant items) has been positive throughout the quarter and has increased steadily since the company announced its maiden positive operating EBITDA in April”. Management has also indicated that “July has begun strongly”.

Outlook

In our view, HUB24’s 4Q15 inflow report represents an encouraging development for the company and its shareholders. While HUB24’s “strong pipeline of business opportunities” and the dynamic nature of the industry suggests to us that growth operating expenditure will continue to suppress reported earnings for a while yet, the rate of platform growth and recent positive monthly underlying EBITDA results suggest an inflection point in Group profitability is fast approaching.

Price

HUB24’s recent move through the trading band between $1.25 and $1.39 has marked the end of the consolidation that has been in place since the first quarter of 2014. With the shares gapping up in quick succession, momentum is clearly to the upside which increases the chances of a renewed assault on the all-time highs of $1.57 in the near future. However, with the RSI now heavily overbought, we may see a sideways move in the meantime.

Worth buying

The recent updates provided by HUB24 indicate that the company is continuing to gain traction in what is a high growth and fragmented market. While the requirement to continually invest ahead of the demand curve has weighed on HUB24’s profitability, we believe the company is making meaningful progress, as evidenced by the rapid growth in FUA and modest gains in margins, both of which suggest to us that the company’s offering is resonating with advisers and clients alike.

Notwithstanding some uncertainty regarding the timing of the company’s transition to profitability and the current price to book value multiple, we expect continued momentum in FUA and operating leverage to ultimately deliver investors attractive returns over the medium-term. On this basis, we continue to rate HUB24 as a Buy to investors with high risk tolerance and a medium to longer term investment horizon.

James Lennon is an Analyst at Fat Prophets share market research. To receive a recent Fat Prophets Report, call 0800 438 328 or Click here.

Disclosure: HUB24 is held within the Fat Prophets Concentrated Australian Share and Small/Mid-Cap Models.

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