EUR 850.00 For Business Accounts Only

Morningstar | Fee Pressures Beginning to Show Despite Netwealth's Strong Flows

The most notable aspect of Netwealth's fiscal 2018 financial result was that management expects the EBITDA margin of 51% achieved in fiscal 2018 to remain stable in fiscal 2019, which reflects increased reinvestment in the business. Although we previously expected margin expansion in fiscal 2019 and beyond, via fixed cost leverage, we're not altogether surprised competitive pressures are weighing on margins. This aligns with our view the company lacks an economic moat. We've largely maintained our investment thesis, namely that we expect strong revenue growth as the company grows quickly from a relatively low base. However, we also expect competition to restrict margin expansion and this is the key difference between our fair value estimate and the market price.

The fiscal 2018 financial result, including the underlying NPAT of AUD 29 million, was released in July along with final quarter flows in funds under management and administration, or FUMA, meaning the result contained little new information. Although we've slightly reduced our margin forecasts for Netwealth, we've also slightly increased our revenue growth assumptions with no net effect on our AUD 5.30 fair value estimate. At the current market price of AUD 8.78, the shares remain overvalued.

From a relatively low base, Netwealth continues to outearn its market share in net flows in funds under administration, or FUA, and we remain positive on the firm's ability to continue to attract flows. With almost AUD 1.8 billion in FUA by June 2018, Netwealth grew its platform business by more than 40% in fiscal 2018, although only 25% of this growth was fee-paying. We forecast the firm to grow FUA at 24% CAGR for the five years ended fiscal 2023.

Despite our forecasts for strong FUA growth, competitive pressures should remain. Less than half Netwealth's FUA flows in the June 2018 quarter were fee-paying, and as a proportion of total FUA, fee-paying FUA fell to 61.6% in fiscal 2018 from 69.3% in fiscal 2017. Platform revenue per average FUA fell 12% in fiscal 2018 to 53.4 basis points, and we expect this to continue to contract by more than 5% per year over the next five years. Illustrative of this highly competitive environment, BT lowered fees on its Panorama platform in July, effectively capping fees at around AUD 2,000 per account.

Netwealth will pay full-year dividends of AUD 9.15 cents, fully franked. An additional AUD 5.18 cents per share will be paid as a special dividend, representing excess cash from the sale of financial advisory business, Bridgeport. With no debt and strong free cash flows, the balance sheet remains in good shape. We expect the firm can continue paying around 70% of underlying earnings in dividends.