EUR 850.00 For Business Accounts Only

Morningstar | Netwealth’s Still Looks Expensive Despite Further Strong FUMA Growth

We maintain our AUD 5.50 per share fair value estimate for Netwealth following the release of fourth-quarter funds under management and administration, or FUMA, data. Despite a 32% increase in FUMA to AUD 27 billion in fiscal 2019, growth was largely in line with our 30% forecast and we have maintained our earnings forecast. FUMA growth slowed from 45% in fiscal 2018 and we expect growth will continue slowing down to 25% in fiscal 2020 as the business matures. Despite falling 20% over the last month, at AUD 7.64, we believe Netwealth shares are overvalued.

Although FUMA is growing quickly, the investment platform market is highly competitive and Netwealth lacks the economic moat required to create pricing power and sustain long-term profit margins. FUMA growth is likely to be offset by price competition to some degree and platform fees should continue falling. Management said pricing pressure persisted in the quarter but Netwealth is gaining market share at ‘sustainable margins’. This is broadly in line with previous guidance, and our forecasts, for a stable EBITDA margin between fiscal 2018 and 2019.

The proportion of fee-paying funds under administration, or FUA, stabilised in the fourth quarter at 61.0%, slightly below the 61.6% achieved in fiscal 2018 but well below the 69.3% in fiscal 2017. However, this doesn't necessarily mean pricing has stabilised and the revenue/FUMA margin is likely to fall at a CAGR of 4% over the next five years. Despite falling revenue margin, we’re a little surprised profit margins aren’t expanding given the reasonably fixed cost base and strong revenue growth, but expect further clarification during the fiscal 2019 results next month.