Financial advice platform and software provider Hub24 (ASX: HUB) has once again delivered a robust financial performance in H1 FY 2025, with revenue climbing 25% to $195.2 million, and statutory net profit after tax up a whopping 54% to $33.1 million. That said, underlying earnings per share (a better measure of the growth rate) was up 41% to 51 cents per share for the half. In response, the Hub24 share price gained around 4% to close at $84.39. You can see Hub24’s earnings per share growth trajectory below.
If we annualised the first half underlying earnings per share, that would imply an FY 2025 P/E multiple of about over 80. If we extrapolate the 41% growth in underlying earnings per share to the second half, we would expect about $1.14 in earnings per share for FY 2025. That would put Hub24 on a FY 2025 P/E ratio of about 75, using underlying earnings per share. But on the other hand if we just doubled statutory earnings per share of about 41 cents, then Hub24 would be on a “run-rate” P/E ratio of 100. Any way you look at it, there is plenty of optimism in the share price.
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For an investment to succeed when the business is trading on such a lofty multiple, the company needs to have some degree of pricing power and some sort of competitive advantage. One empirical measure of pricing power that I look at is is net profit after tax margins. As you can see below, H1 FY 2025 was a very pleasing record result in that regard.
Since Hub24 reports platform funds under administration on a quarterly basis, we already knew that Q2 FY 2025 was a record result, even excluding the large customer transition. For H1 FY 2025 “underlying” platform inflows came in at $8b, split evenly between the two quarters. To Hub’s credit, they excluded the one-off large migration flows of $1.5b from their underlying numbers, and the real result was actually better than the underlying result.
These strong inflows, along with bullish stock markets, buoyed Platform funds under administration by 36% to $98.9 billion, with the company disclosing that January was also strong, with that figure sitting at $102.6 billion as of 13 Feb 2025. The company believes that its annual underlying net flows should come in at between $11b and $15b and has now lifted its target funds under administration (FUA) for the end of FY 2026 from a range of $115 billion to $123 billion of custodial FUA to a range of $123 billion to $135 billion.
The leading indicator for this growth is adviser numbers. During H1 FY 2025, Hub24 grew active advisers on the platform by 8% from 4,525 at the end of June 2024 to 4886 at the end of December 2024. As you can see below, the company is also increasing funds on the platform per adviser. With 31% of Advisers already accessing the platform, the quantum of funds per adviser will increasingly become more important for Hub24’s growth. That said, there is still scope for plenty of growth in active adviser numbers in the next few years.
One of the main reasons advisers are choosing Hub24 is because it appears to be the best quality platform on the market. For example, the Investment Trends Platform Competitive Analysis & Benchmarking Report 2024 rated it best for Managed Accounts Functionality, Product Offering, Online Business Management, and Decision Support Tools. Meanwhile Adviser Ratings rated it best on adviser experience, client experience, overall investment options, overall functionality, and ease of client onboarding. The chart below from the 2024 Adviser Ratings report suggests it has the best reputation, based on NPS score.
All this bodes well for organic growth but doesn’t necessarily prove that the company has much pricing power. However, on the earnings conference call, the Hub24 CEO Andrew Alcock said, “we’re not seeing pricing pressure at all in the market. Right now, it’s been fairly consistent.” So while Hub24 might not have much power to increase prices, at least it is holding its own in the market without having to resort to discounting.
As you can see below, the platform business generates the lion’s share of the company’s earnings. Nonetheless, it was good to see the technology solutions (which includes the company’s software solutions) achieved some significant operating profit growth, with underlying EBITA jumping 37% to $13.8 million in the half. While this growth was still below the 39% increase in platform underlying EBITDA (to $66.7 million), it was a notable improvement given that the tech solutions segment has historically struggled to achieve much organic growth at al; the big jump in H1 FY 2023 was from the acquisition of Class Limited (ASX: CL1)
Finally, it is worth noting that Hub24 has now clearly overtaken Netwealth to become the fastest-growing financial adviser platform, with a 1.3% gain in market share compared to a 0.9% gain for Netwealth. This strong growth provides further evidence of a competitive advantage.
HUB 24 Valuation
With net cash of just over $73 million, Hub24 has a strong balance sheet. And with free cash flow of $29.5 million in the last half (or $49.5 million if you exclude the purchase of treasury shares for remuneration) the business is clearly well positioned to invest in growth. That said, whether you are looking at profit, underlying profit, or free cash flow, Hub24 appears to be a very healthy business, priced as such.
Hub24 benefits massively from strong stock markets because that increases funds under administration and flows. And Hub24 also benefits from higher interest rates, due to increased interest income. The truth is that H1 FY 2025 saw a beneficial environment for the company. To quote the CEO: “the pipeline is really strong, and the positive sentiment that we’re seeing come from the distribution network is really strong. And equally, the market seem to be very strong as well”.
It looks to me like our cups overfloweth with optimism; and that makes me cautious.
I have been prevaricating about whether or not to move Hub24 to hold all day.
In my gut, I do feel like the price has gotten a little ahead of itself. When a stock gets momentum, it will often overshoot to the upside before coming back down to earth, when things get tough. Offsetting my caution is my experience that moving a stock to hold based purely on valuation often turns out to be overly cautious. At this point, the line between buy and hold depends partly on whether I think the current bull market will continue and partly on taking a long term view (and being willing to ride out volatility). Instinctively, I think this stock might have gotten a bit too hot.
I’m hesitant to downgrade a stock based purely on valuation, especially when the business is of high quality already and boasts steadily improving margins. For now, I will therefore keep Hub24 as a Buy. However, please note that I might move it to hold if the stock price increases much more, or if I felt that economic conditions were becoming less favourable, or if the competitive threat were to grow.
Disclosure: The author of this article owns shares in HUB and will not trade HUB shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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