The Hub24 Ltd (ASX: HUB) share price is zooming higher but this could be the perfect time to lock in profits, according to JPMorgan.
The Hub24 share price surged 5% to $21.80 in the last hour of trade and has increased by three-fold over the past year.
But JPMorgan thinks now is the time to sell the shares as it downgraded Hub24 to "underweight" (equivalent to a "sell").
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Margin squeeze triggers downgrade for Hub24
The downgrade comes after Hub24's rival, the Netwealth Group Ltd (ASX: NWL) share price, said its deposit agreement with the Australia and New Zealand Banking GrpLtd (ASX: ANZ) was terminated.
The agreement paid Netwealth an enviable 95 basis point premium over the cash rate for deposits on its platform.
The cash rate is currently set at 0.1% by the Reserve Bank of Australia (RBA). You'd be hard pressed to find a rate close to 1% for your cash!
Small cut makes for material drop in earnings
"Cash margin drops straight through to EBITDA for HUB and NWL," said JPMoran.
"And any repricing or downward pressure on the rate is likely to have a material impact on earnings.
"At a high level, cash margin currently accounts for ~34% of NWL's FY21E EBITDA and up to 47% of HUB's FY21E EBITDA."
How low rates will hurt Hub24 and Netwealth share prices
The broker estimated that every 10-basis point (0.1%) decrease in the cash margin will cut around 4% off both companies' earnings before interest, tax, depreciation and amortisation (EBITDA) figure.
"Given where interest rates are, and the messaging from the RBA, we have rebased our FY23 estimates to a cash margin of 55bps (i.e., 45bps over a 10bps overnight cash rate)," added JPMorgan.
"This translates into a ~20% reduction in FY23E EBITDA for both HUB and NWL."
The cash rate is unlikely to move higher anytime soon too. The RBA has given a verbal commitment to keep the rate at record lows till 2024 at least as Australia cycles through the economic impact of COVID-19.
Valuation downgrade
The impact of JPMorgan's revised cash margin assumption led to a drop in its 12-month price target on the Hub24 share price to $18.30 from $23.30 a share.
The Netwealth share price isn't spared either. The broker's 12-month target on the ASX share falls to $11.80 from $14.50 a share.
And in case you are wondering, JPMorgan's recommendation on Netwealth is kept at "underweight".
