EUR 850.00 For Business Accounts Only

Morningstar | Netwealth Remains Expensive Despite Strong Third-Quarter Funds Growth

Netwealth’s quarterly result was broadly in line with our forecast for AUD 27 billion in FUMA by fiscal year-end, which implies a 30% increase on the prior year. We continue to expect Netwealth to experience fee compression, due its lack of an economic moat and a gradual slowing in FUMA growth over the next decade. However, operating leverage should enable strong EPS growth, and we forecast a relatively strong EPS CAGR of 15% over the next decade. We have maintained our fair value estimate at AUD 5.50 per share, and, at the current market price of AUD 8.64, we continue to believe the shares are significantly overvalued. The share price implies a fiscal 2020 price/earnings, or PE, ratio of 44 versus 28 at our fair value estimate.

Netwealth increased funds under administration and advice, or FUMA, to a record AUD 24.6 billion in the third quarter of fiscal 2019, 11% higher than the prior quarter and 32% above the prior comparable period. However, most of the growth was caused by the strong rebound in equity markets during the quarter following the very weak second fiscal quarter. Excluding market growth, FUMA increased by 5% versus the prior quarter, and we expect the 5% share price fall that followed the announcement was caused by net FUMA inflows missing market expectations.

FUMA net inflows of AUD 1.1 billion were 1.1% lower than the prior quarter and 4.8% below the prior comparable period. This means FUMA is still growing but at a slowing rate. However, we don’t read too much into just one quarter’s result. The announcement earlier this week that Netwealth has won ANZ Private as a client is likely to add to net inflows longer term but is immaterial to our fair value estimate.

The 4.3% increase in member accounts was surprisingly strong, but we were disappointed that the number of financial intermediaries was not reported this quarter as they were in the previous quarter. The increase in accounts should be positive for FUMA inflows in the long term, but FUMA inflows per account were impacted by the strong account growth during the quarter. We expect this is due to new accounts having relatively low balances that may also generate relatively high fees on FUMA. However, the growth in FUMA overall appears to have pushed many accounts into relatively low fee brackets, with the percentage of fee earning FUMA falling to 61% from 62% in the prior quarter, a trend we expect to continue.