Australia | Aug 20 2019
Netwealth Group is likely to benefit from wealth advisers seeking its specialist platform and technology, although further reductions in official cash rates loom as a risk.
-Outlook for net flows "in excess of $7bn" for FY20
-Downside risk to revenue and pricing if official cash rates head lower
-Leveraging superior technology should allow for protection of margins
By Eva Brocklehurst
The specialist platform market may be volatile and prevailing economic conditions uncertain yet Netwealth Group ((NWL)) has not been deterred, achieving record flows and strong growth in earnings while absorbing any price pressures. Pricing pressures grew last financial year when BT Panorama re-set its rates.
The company expects funds under administration (FUA) to exceed $30bn by the end of FY20, assuming no adverse impact from financial markets, and will be looking to reinvest in order to sustain its leadership position with advisers rather than pursue margin gains.
The outlook for net flows is "in excess of $7bn" which, UBS surmises, assumes existing advisers continue to add around $4bn per annum from new member accounts and new adviser wins add around $3bn.
Assuming normalised market returns this, in turn, implies average funds under management (FUM) could lift by around 35%. However, allowing for heightened revenue margin pressures and fee compression, UBS suspects a 20% lift is more likely.
UBS upgrades to Neutral from Sell, assessing net flows are sustainable and the downside risks have eased. The broker considers Netwealth is now be in a better position to absorb ongoing revenue margin pressures.
This is particularly the case if new third-party platform competitors emerge or further cuts to official rate cuts put pressure on cash account spreads. Ord Minnett assesses future benefits will stem from advisers seeking boutique licensing and adopting open product lists as well as innovative technologies.
The broker forecasts growth in earnings per share (EPS) to compound over the next five years at 23% per annum and upgrades to Buy from Accumulate. Morgans, on the other hand, is sticking with a Hold rating, preferring a higher "margin of safety" before taking a more positive view, as the stock is trading on elevated near-term valuation metrics.
Credit Suisse is confident the company can continue to grow earnings, forecasting FY20 flows of $7.25bn. The growth profile may not be quite as high as once envisaged, because of pricing pressure, but growth of 15-20% in EPS is still expected over the next three years.
In the first quarter the ANZ Private account will transition onto Netwealth platforms, which the broker estimates to be worth around $800m, although it could be up to $2.5bn. Any further wins from large institutions remain an upside risk.
Citi expects net flows to pick up in FY20, driven by market share gains and an improvement in adviser activity levels but also envisages downside risks to overall industry pricing, particularly as official cash rates head lower.
Netwealth is introducing a range of software-as-a-service style pricing for services that are not readily available from other investment platforms in the market and Bell Potter believes this should enable the company to protect its margins. Morgans agrees it makes sense for Netwealth to monetise its superior technology.
Yet Macquarie speculates whether a company with 2.5% market share and strong growth needs to diversify its revenue streams and build out the platform. The broker also highlights the potential risk of further reductions to the Reserve Bank cash rate as, when these are passed on, the total cost to the client goes up.
Citi considers revenue margins are likely to be lower going forward, reflecting the skew towards clients with higher balances and the reduction in the official cash rate. Still, guidance for operating earnings (EBITDA) margins to be slightly lower than FY19 appears conservative, and the broker forecasts an expansion of 20 basis points to 52.4% in FY20.
Cash margin revenue can be sustained above an official cash rate of 0.5%, Morgans asserts. If Netwealth were to absorb 25 basis points of margin pressure (from an official rate cut), the broker calculates this would have a negative -9% earnings impact on a full year basis.
Credit Suisse is forecasting a revenue margin decline of -7 basis points in FY20, partly because the ANZ Private business is very low margin and partly from competition.
While market noise may be focused on revenue margins, cash spreads and competition, Ord Minnett points out structural momentum should still mean both funds under administration and profit quadruple over the next eight years.
Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, has reiterated a Buy rating and $10.14 target. The database has one Buy rating (Ord Minnett), four Hold and one Sell (Macquarie). The consensus target is $7.68, suggesting 1.0% upside to the last share price. This compares with $8.15 ahead of the results. Targets range from $6.20 (Macquarie) to $8.95 (Ord Minnett).
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