BUY HOLD SELL – Netwealth Group Limited (ASX: NWL)
Netwealth Group Limited (ASX: NWL) is an Australia-based technology company that offers superannuation and non-superannuation platform product. NWL provides financial Intermediaries and investors with financial services including managed funds, investor directed portfolio services, a superannuation master fund, separately managed accounts and self-managed superannuation administration services. NWL offers portfolio administration, investment management tools, and investment and managed account solutions. The Netwealth Managed Account gives user access to a range of managed models that are created and maintained by investment managers.
Of the major platforms, Netwealth is the fastest growing in absolute terms and relative to its size (excluding the IOOF/ANZ acquisition) and is now the 7th largest platform provider in the market with market share of 3.6%, up 1.1% for the year providing significant potential for further growth.
NWL reported last Tuesday and the reaction was positive, with the stock up 10% on the day. Net profit was up 22%, to $43.8m. Increased trading activity buoyed fees. EBITDA came in at $64.8m, up almost 25%. The company declared as 7.8c dividend, up 18% from the year prior. Whilst those numbers are excellent, there was one other figure that really stood out. Funds under management grew by $8bn(+35%) to $31.5bn, despite a hit of $900m from adverse market movements.
A 35% growth in FUM is remarkable and it highlights that NWL is perfectly placed to take advantage of the ongoing trend away from traditional fund managers to platforms that allow investors more control over their own affairs.
This is not a new phenomenon but it is one that has a long way to go. Technology has increasingly empowered companies to give people the control over their investments that they desire, whilst the performance and management of many of the old hat firms (AMP for example) have left a lot to be desired and have accelerated the trend. All that said, there are still billions and billions of dollars parked in the old hat firms. NWL has $31.5bn under management. Sounds impressive, until you consider some of the other. AMP, for all their troubles, still have circa $200bn. Colonial First State has $150bn. MLC has $85bn.
What those numbers highlight, however, is that there is still a massive opportunity available to NWL, provided they continue to execute. To put the size of the opportunity into context, it was estimated in 2018 that the retreat of the big four banks from the wealth management business would open up some $900bn for the contestable wealth platform market.
- ROE is outstanding at 62.1% and well above its peers in PPS and HUB at 16% and 23.8% respectively.
- Revenue and EPS growth are expected to grow in the high teens for the next few years. One of our favourite checks of operational efficiency is also ticked off – EPS growth anticipated to outpace revenue growth in FY2 and FY3.
- On a PE of 64.7x its is not cheap. HUB sits on 55.8x and PPS on 42.3x. On a peers basis, it’s not outrageous.
- Of the eight brokers that follow the company, 75% have a HOLD recommendation 25% have a SELL recommendation.
- It is trading at a 20.4% premium to the average broker target surveyed by Thomson Reuters and a 64.1% discount to intrinsic value.
WHAT SORT OF INVESTMENT IS NWL?
Make no mistake, this is a growth stock. In the same way the banks used to be growth stocks. New technology, new platform, new opportunity. NWL’s share price will be driven by their ability to gain market share, build sustainable and recurring revenue, minimise client turnover and maintain margins. That last point won’t be easy. Whilst the recent results were helped along by COVID, with trading volumes increased through the initial onslaught of the pandemic, this level of activity won’t likely be repeated in future periods. What will prevail, instead, were the conditions that existed prior to COVID and those conditions saw platforms battling for clients, lowering prices, and squeezing margins. NWL itself changed the way it charges users, slashing account fees in February for the first time since 2012 to bring them in line with market rates. What will set NWL apart, providing the execution is sound, is the company’s pledge to continue boosting expenditure on IT infrastructure and development. If they continue to build a better mousetrap and outpace competitors (no mean feat mind you) the funds will continue to flow. Record FUA net inflows of $9.1bn for the year, easily outpaced its peers. Expects FY21 net inflows of more than $8bn, which would be a 25% increase on starting FUA.
Credit Suisse is the most bullish, upgrading to NEUTRAL after results. Guidance for flows of $8bn in FY21 was significantly higher than previous forecasts. Despite NWL pointing to revenue margin pressure, the broker considers this manageable given the robust growth in FUA. Ord Minnett cites a resilient business model, FY20 results coming in ahead of expectations. Adds management tends to be conservative and expects more upside. Morgans notes advisor transitions continue to assist FUA growth, with the company expecting the end of grandfathered commissions (December 2020) to further increase these transitions. Macquarie with the most bearish price target, believes NWL will see margin pressure and cost growth as the platform’s FUA continues to grow.
NWL is up 178% since its March low and has just come off its all-time high, down 7.5% in the last six trading days. Post results excitement fading. RSI has come off the top, back from overbought territory. There appears to be some consolidation around the 1250c level, which would be a much more attractive entry price should support hold.
More red than blue on the screen, notably a few large transactions following the end of the financial year. AFI the most recent purchase, buying 1.1m shares. On Wednesday, Joint Managing Director Michael Heine disclosed the sale of 5.5 shares worth $76.5m. Owns 135.4m shares following the transaction (including indirect shares held by Leslie Max Henie). Not a good look when directors are selling.
Short interest has reduced materially over the year to date, down from 6.4% last August to 1.6% currently. Fewer people taking bets against the business is an encouraging sign. The short squeeze mid-March a result of the business update following the RBA’s policy announcement.