Netwealth Group: Investing but still growing strongly

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Analyst
Date posted:
19 August 2021, 11:00 AM
Sectors Covered:
Contractors/Developers, Diversified Financials

  • Netwealth Group (ASX:NWL) reported FY21 underlying NPAT growth of 23.5% to A$54.1m. The result was slightly (~2%) below expectations based on a lower 2H21 revenue margin.
  • Cost growth will accelerate in FY22, improving the operating infrastructure and allowing the business to scale efficiently over the medium-term.
  • FY22 net inflow guidance is A$10bn (MorgansE A$10.5bn) and Admin margin is expected to remain stable on 2H21. There is no resolution to the pooled cash arrangement as yet – clarity near-term will remove lingering uncertainty.
  • We find it hard to fault NWL on strategy, execution, market opportunity and financial strength. Whilst upside to our valuation is emerging, we retain a Hold on valuation.

FY21: Another strong year

FY21 underlying EBITDA of A$79.3m was up 22.5% on the pcp, with 2H retracting 4% on 1H. 2H21 revenue (down 0.6% on 1H) was impacted by back-book repricing with 2H revenue margin of 33.7bp (32.9bp using a simple avg). Whilst a steep fall was expected, 2H margin was below expectations (34.8bp).

2H21 EBITDA margin remained strong at 53.6%, down on 1H as expected however still +100bp on pcp.

F21 FUA (pre-released) of A$47.1bn was up 49.6% on pcp, with fee paying FUA of A$30.9bn up 55.6% on pcp. Adviser growth was 5% in 2H to 3,130. Pooled cash closed at 6.9% of FUA (A$3.3bn), lower vs a 7.9% average through FY21.

Analysis: FY22 investment to prepare for further scale

Revenue margin: NWL stated that FY22 Admin fee margin (implied 16.8bps margin) is expected to remain stable in FY22 (admin fees are 50% of platform revenue). We expect a relatively flat 1H22 revenue margin (hoh), declining to 31.2bps in 2H22 post assumed lower pooled earnings from 4Q22.

Pooled cash earnings: NWL expects to finalise new pooled cash arrangements before the Mar-22 contract date – we expect resolution within CY21. NWL pointed to the benefit of any RBA cash rate increase, implying a very similar cash account structure is likely to be in place. Our forecasts include a 40bp lower ‘take rate’ on pooled cash. 

Investment for scale: NWL have called out a ‘strategic’ step-up in investment in people and technology. IT headcount is planned to increase by 35 (43 in FY21) and a step up in operating costs (systems/cloud based hosting) will occur. NWL stated the investment will allow the group to effectively execute on the scale they expect to deliver over the next 5+ years.

Non-custody capability: NWL will launch its non-custody admin service from 2H22, which will be tightly integrated with the custody offering. The offering will be an extension of the existing service and provide additional admin fees (a bps model).

Flows guidance: NWL expects net inflows of A$10bn. Our forecasts include A$10.5bn of net inflows (unchanged post result).

FY22 commences with starting FUA +22% on average FY21. Based on 2H21 revenue margin, this secures ~12% FY22 revenue growth (before inflows / market movements).

Forecasts down near-term on costs; little change to the long-term

Forecast changes: FY22/23F EPS down by 6.5%/3.6% primarily on cost growth; FY24 effectively unchanged. Our DCF valuation moves to (login to view).

Investment view: retain a Hold on valuation

We view NWL as an attractive business, benefitting from a strong industry position, high cash generation and industry tailwinds. Near-term investment and cut to pooled cash earnings dampens the run-rate in FY22/23, however we still expect a five-year EPS CAGR of +20% to FY26.

Price catalysts: pooled cash clarity

Clarity on pooled cash margin; and large client wins (transitions).

Risks

Lower-than-expected ‘take rate’ on pooled cash; aggressive/irrational competitor pricing; lower-than-expected inflows; loss of a major client relationship; greater-than-expected revenue margin pressure; and slower medium-term net inflow profile versus market expectations.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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