After reaching a high of $15.55 in May, the HUB share price has since fallen 24% to the price at the time of publishing of $11.80. This is now the sixth time that the HUB share price has fallen below $12.00 over the past twelve months. It subsequently rallied to north of at least $13.50 on each of the previous five occasions. These figures compare to Clime’s one year forward valuation of $16.15.
HUB share price chart
Why has the stock price been thus range bound over the past year?
Between 30 June 2018 and 31 March 2019, HUB’s funds under administration increased from $8.3 billion to $11.5 billion, growth of 39%. Despite this, the shares were trading below the $11.55 price as at 30 June 2018.
This has reflected various concerns, namely:
- Price competition
- Cost growth
- A potential negative impact from a falling official cash rate.
In relation to price competition, this kicked off with changes to the BT Panorama rate card in July 2018. The best evidence of the impact of this competition is the change in new business wins. In this regard, HUB’s net inflows in the September 2018 quarter were $638 million, up 19% on the same quarter in the prior year. In the December quarter, HUB recorded $1.5 billion of net inflows, which was $750 million excluding one large transition, being the Fitzpatricks group. HUB management has also commented that the group has not reduced their rate card in response to competitors, while the average revenue margin earned has reduced as the business has won larger deals on commensurately lower fee arrangements.
HUB quarterly net inflows, $ million
Source: HUB24 ASX announcements, Clime Research
In the first half FY2019 result HUB reported a 34% increase in platform operating expenses, from $8.0 million to $10.8 million, in addition to a $1.3m increase in capitalised investment in intangible assets. Management has consistently indicated that there are numerous opportunities for investment to improve the functionality and therefore the competitive position of the platform. Importantly, this is being managed while continuing to achieve an expansion in operating margins. The platform EBITDA margin increased from 26% to 31% over the year to the first half result.
Relevance of the cash rate
On 3 July, an article was published in the AFR titled Netwealth and Hub24 smashed by rate cuts. It argued that the decline in the official cash rate would result in “immense pressure on the profit margins of Netwealth and Hub24”. It is important to note that there is no direct impact on HUB’s profit margins from the recent cuts to the official cash rate. HUB, like other platforms, earns a spread on funds in investors’ transaction accounts, in the same way that banks do. When the official cash rate is reduced, the rate that HUB can earn on the cash falls in tandem with the rate paid to investors, for no net impact on the platform. Following the most recent cash rate cut, HUB is paying an average of approximately 50bp on transaction cash accounts. If the RBA were to cut the cash rate a further three times, this may well begin to reduce the margin which HUB earns on cash, because the interest rate paid on transaction accounts cannot drop below zero. For comparison, BT Panorama has been paying investors 50bp less than HUB on cash. Consequently, BT Panorama will be first in line to face a squeeze on their cash margin.