HUB24 (HUB.ASX)

Fat Prophets

Tuesday 24th February 2015

HUB24 (HUB.ASX)

What’s new?

HUB24 recently released a trading update for the three months ending 31 December 2014, with the key feature being continued strong inflows on both a gross and net basis. Specifically, the company reported that its Funds Under Administration (FUA) increased by 21.4 percent from $1,030.8 million as at 3Q14 to $1,251.4 million, with gross and net inflows for the period being $225.6 million and $189.7 million, respectively. Encouragingly for shareholders, the 4Q14 result represents HUB24’s fourth consecutive period of record gross and net inflows.

While growth in HUB24’s FUA has been strong, in our view, the sources of this growth remain well balanced, and thus provide a positive read-through for future periods. As outlined in the company’s 4Q14 update, the average FUA per adviser increased from $2.69 million to $2.98 million, while the number of advisers increased by 37 to 420. This reflects the likelihood that, in our view, new advisers to HUB24’s platform are generally not able or willing to transition all of their individual client accounts across to HUB24’s platform from the get-go, but are continuing to do so over time.

In order to continue to attract new advisers and their client’s accounts onto HUB24’s platform, and perhaps in recognition of how competitive the platform services market is, the company has continued to invest in its product offering. During 4Q14, HUB24 reported that it has added ING DIRECT’s 3-month, 6-month and 1-year term deposit products to its platform, bringing the number of term deposits on HUB24’s platform to five providers. This was complemented during the period by the addition of another 34 managed funds, 9 ETF’s and 7 LIC’s.

Reflecting the growing demand for managed portfolios and SMA investments, it is worth noting that HUB24’s FUA held within its managed portfolios now accounts for 44 percent of the company’s assets, up from 38 percent as at 4Q13. We expect this trend to continue on the basis that wrap platforms and separately managed accounts (SMAs) are forecast to remain one of the fastest growing sub-segments of Australia’s wealth management industry. It also provides further proof that HUB24’s investment strategy is supporting adviser engagement and uptake.

Outlook

While HUB24 provided a detailed overview of its operating performance to date and outlined its expectations for the future at its recent Annual General Meeting, management made no mention of the near-term earnings trajectory. As noted in previous trading updates, HUB24 is achieving scale efficiencies across its business. However to date, management’s preference for investing ahead of the curve continues to make it difficult to predict when HUB24 will ultimately transition to profitability.

Price

Having shot out of the gates after being discovered by the market in 2013, HUB24’s share price trended lower through 2014 and appears to have now settled around current levels. While news flow regarding HUB24’s FUA continues to impress us and provides a good base from which to ultimately generate profitable growth, the timing of this inflection point remains unknown, due in part to management’s intent to invest ahead of the curve. By virtue of HUB24’s current loss making position, valuation metrics are limited – HUB24 is currently trading at around 4.5 times FY15 sales.

Worth buying?

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 on a medium-term view. On this basis, we rate HUB24 as a Buy for investors with a medium to longer term investment horizon and a high appetite for risk. Also by virtue of being a microcap, investors need to be patient when considering entering or exiting the stock, and should factor share liquidity into their overall investment strategy.

Disclosure: Fat Prophets, and interests associated with the company, hold shares in HUB24.

Greg Smith is the Head of Research at Fat Prophets share market research.

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