Is Netwealth Fair Value?

This story features NETWEALTH GROUP LIMITED. For more info SHARE ANALYSIS: NWL

The market opportunity for Netwealth is substantial and brokers are prepared to look through the negative flows in the December quarter, although valuation remains a sticking point.

-Netwealth remains upbeat about transitions to its wealth management platform in the second half
-Brokers struggle with valuation, despite a leading market position
-Tender activity and business opportunities should provide momentum in 2019
 

By Eva Brocklehurst

Underlying net flows declined in the December quarter, for the first time since wealth manager Netwealth ((NWL)) listed on the ASX. This resulted in funds under administration falling short of broker expectations.

The company considers this weaker quarter to be temporary, as advisers re-appraise platform offerings. Nevertheless, the market opportunity is substantial and Netwealth expects an increasing share of the $847bn platform market.

Funds under administration were $18.9bn as of the end of December. Funds under administration were down -1% because of negative markets, partially offset by $876m in inflows. This volume of inflows was -17% lower than Citi forecast.

Nevertheless, the broker notes the increase in fee-paying funds under administration is a positive for revenue margins and expects a pick up in the second half, driven by new clients and the ongoing structural shift towards specialist platform providers.

Citi suspects there is still a risk that the transition to the company's platform could take longer than forecast and slip into FY20. Downside risk to pricing and margins is also a reality, as major platform providers fight back to maintain market share.

Credit Suisse is not too concerned about the level of flows, as the drop in net flows is likely stemming from fewer high-balance account transitions. The miss probably corresponds to very low value and mostly non-fee earning business.

The company did not adjust its guidance for net flows in FY19 and this, plus upbeat commentary on transitions in the second half, provides the broker with confidence that the miss in the December quarter was largely because of delays rather than a change in the organic flow rate.

RC Dislocation

The dislocation caused by the Hayne Royal Commission and its investigation of the financial advice sector has been the main cause of wealth stocks missing flows or sales estimates, Bell Potter believes. This is expected to pass following the RC's recommendations to the government, which are due out on February 1.

While there will be different implications for respective stocks in the sector, the broker expects Netwealth to be a key beneficiary of the pending changes. The company has already indicated it expects an uptick in flows in early 2019.

Following the quarterly update, Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, makes minor reductions to estimates and maintains a Buy rating with a $9.77 target.

UBS continues to believe the company's technology and service will aid its leading position. Still, there are risks from competitive responses that could constrain an acceleration in flows, or reduce revenue margins, and this is not adequately reflected in the company's PE (price/earnings) ratio of 47x. Hence, UBS maintains a Sell rating.

Credit Suisse believes the company is making the most of its unique opportunity caused by the disruption in wealth management, but agrees the PE limits the upside. The broker remains comfortable with its forecasts for FY19-21, for net flows of $4.5-5.0bn.

Macquarie's view regarding specialty platform providers is largely unchanged, but limited differentiation and substitute offerings are pointing to intensifying fee margin pressure. While the growth outlook is robust, this broker also struggles from a valuation perspective and maintains a Neutral rating.

Tender activity and business opportunities remain attractive, and the pipeline is strong for new business which should provide momentum in 2019 as clients are transitioned. Yet costs are being brought forward to capitalise on the market opportunity and, Macquarie assesses, this may be a headwind for the first half result.

There are four Hold ratings and one Sell (UBS) on the database. The consensus target is $7.83, suggesting 16.3% upside to the last share price. Targets range from $7.20 (UBS) to $8.60 (Ord Minnett, yet to update on the quarter).

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