Last week I wrote about an ASX-listed stock, CYBG PLC (CYB), which we think has strong prospects over the next few years. Over the coming weeks, I will write on other Australian stocks I have high conviction on, particularly ones where there has been a pullback in the share price, and a good entry point is on offer to investors.
Keys to success
As you know, my key variable in an investment is the size of its addressable market and what percentage of that addressable market it could take through time. The bigger the addressable market, the bigger the potential future, if management can execute well.
I also look for top down macroeconomic structural growth themes and then the single best stock to exploit that theme. The stock I write about today, HUB 24 (HUB.ASX), is a classic top down meets bottom up idea. It is my number one way of playing the structural growth in self-managed super funds and independent financial advice.
Recent price action in HUB has been very volatile, with the six-month price chart looking uncannily like a map of the top half of Australia! The price action since June 30 is almost a perfect Gulf of Carpentaria and North Queensland coastline!
OK, you know I’m just mucking around with the analogy above, however, the clear point is that there is investment opportunity at the low point of this trading range, which is around $10.00.
HUB 24 remains a long position for the AIM Global High Conviction Fund. We believe the pull back in share price, partly sparked by BT Panorama’s recently announced price cuts, provides a compelling entry point. We remain confident in the medium-term sectorial tailwinds and the ability of HUB to capture the inevitable flows from the large integrated players to the more dynamic independent platforms.
Price point competitionÂ
On July 23, BT announced that a blanket 15bps admin fee will apply to all new and existing accounts on BT Panorama, along with a fixed account fee of $540. Although we expect to see some margin and pricing pressure for HUB and other independents over time, we see more risk to the larger integrated players, such as IOOF (IFL) and AMP. HUB’s admin fee of less than 30bps, which has been even less for some recent deals, is lower than Netwealth’s 45-50bps fee (headline 30bps for FY18). We are of the view that HUB has less incremental pricing risk relative to peers and, more importantly, that flows will be driven by independent advice and market leading platforms, not lower costs.
HUB also recently announced their fourth quarter flows. Funds under administration (FUA) of $8.3 billion were in line with our expectations and highlighted that the structural shift continues at a rapid pace. FY18 inflows came in at $2.4 billion, a 24% increase year-on-year, and 22 new licencees were signed on during the quarter. It was another strong quarterly inflow result.
Beyond these two recent announcements, our core long HUB thesis is based around the following points:
Systemic industry tailwinds
The platform market in Australia is currently worth around $800 billion (in both Super and non-Super assets). For context, this compares to total superannuation and personal investments in Australia of around $4.8 trillion. The platform market has grown at around 9% per annum over the past eight years. Taking into account the expected growth in superannuation contributions, we expect the platform market to grow between 8-12% per annum for the next decade. This growth provides a fantastic tailwind for all industry participants – and will see total platform assets double over the next 6-7 years.
Structural industry changes
The platform market has historically been dominated by the big integrated players (the big four banks, AMP, Macquarie and IOOF). However, in recent years, the emergence of independent technology-based offerings from HUB and Netwealth has dramatically changed the outlook. The recent dominance of the independents is highlighted by the fact that in first half of 2018, new technology platforms accounted for 36.3% of industry net inflows, despite only having a 3.9% market share of the platform space.
Financial advisors and planners are increasingly looking at migrating their funds to independent, more user friendly, non-institutional platforms. Industry feedback suggests that this has accelerated since the start of the Royal Commission. The ending of trailing commissions will lead to a much more fragmented financial advice market. The graph below shows that HUB achieved 9.8% of market net inflows in the first half of 2018, despite only having 0.79% of industry FUA.
Source: HUB Company Presentation
Scalable business model
HUB generates 95% of EBITDA from its platform business. It generates revenue predominantly from administration fees and cash margin revenue. Scalability will help HUB expand margins and increase profitability over time. The evolution of HUB’s business is slightly behind Netwealth, and as such we believe that the gap in margins will continue to close over time. HUB currently outsources many of its functions, such as its superannuation trustee (OneVue’s Diversa), cash and equities custody (BNP Paribas) and some managed fund services (Ausmaq). We see scope for HUB to bring some of these functions in house, as FUA increases and HUB gains scale.
Market Leading Independent Offering
HUB and Netwealth both have a clear competitive advantage in terms of functionality, market-leading technology and overall platform satisfaction. HUB is first for managed account capability, equal first for overall platform satisfaction and first for ease of use and navigation. HUB continue to invest in their people and product offering and we believe, as long as the platform is rated highly among advisors, HUB will continue to see strong flows.
At current levels, we believe HUB is the most attractive way to play the changing Australian wealth management landscape. It is an industry leader in terms of technology and service, has the highest scope for margin expansion relative to peers and has a large runway for continued growth.
I have increased my fund’s exposure to HUB in this pullback, and encourage you to consider an investment in what I consider a structural growth stock.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
