Netwealth Sacrifices Margin For Growth

This story features NETWEALTH GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: NWL
The company is included in ASX200, ASX300 and ALL-ORDS

Wealth platform Netwealth is moving into the broking space, investing for growth and scale at the expense of near-term earnings margins.

• Netwealth's market update disappoints on FY26 funds flows
• Future outlook now hinges on a major new deal with Morgan Stanley Wealth Management Australia
• Investing in growth means near-term margin pressure
• Management confident the platform can sustain its FUA growth profile out to FY30

By Greg Peel

Netwealth Group ((NWL)) is an Australian financial platform operator offering superannuation, retirement, investment and managed account facilities. 

Shareholders have witnessed the shares appreciating from below $10 ten years ago to above $23 today, though the price peaked above $37 in August last year.

The potential threat from AI had placed software companies, including financial platform operators, globally in the too-hard basket.

Management this week announced FY26 net flows of $15.4bn, implying June quarter flows of $3.2bn, -15% down year on year and -19% below consensus.

Netwealth believes the downturn was due to “Middle East conflict, associated market volatility and recently proposed tax changes” but views the impact as temporary.

While such impacts were somewhat anticipated, management noted this was largely weighted to June, implying a much softer exit.

Management’s view is the impact here is temporary, though UBS notes the last cyclical episode (June quarter FY22 to March quarter FY23) saw flows down some -30% year on year for a period of twelve months.

Investing for Growth

Notwithstanding the risk of more persistent cyclical softness, Netwealth’s FY27 flow guidance of $18bn-20bn, 12% above consensus, will be underpinned by growth initiatives.

As part of an expansion into adjacent Broking and Private Wealth markets, which offer a total addressable funds under management (FUA) market of $600bn over 55-plus brokers, Netwealth announced an agreement with Morgan Stanley Wealth Management Australia, which has $40bn of assets under management.

Growth in this segment will partly underpin ambitions to double FUA by FY30 across both Custody and iHIN (integrated Holder Identification Number), driving 16% compound annual revenue growth on UBS’ revised estimates, but at the expense of a more subdued margin.

Some of the FUA growth target is underpinned by the new agreement with Morgan Stanley Wealth Management, but Ord Minnett also expects underlying organic growth.

Striking the right balance between growth and margin has been a key debate among analysts and investors. The investment in growth initiatives will see margins fall -2 percentage points to 47% in FY27 before gradually recovering back “towards 50%” by FY30, compared to prior consensus’ estimate of 51.5%.

Netwealth’s recent reinvestment strategy had left some investors questioning whether incremental reinvestment would generate meaningful returns, Morgan Stanley (the broker) notes, especially given the circa 40x FY27 PE multiple the shares are trading on.

The Morgan Stanley (Wealth) announcement implies an acceleration in net flow in FY27 to be sustained above consensus expectations to FY30. Morgan Stanley (the broker) sees the net flow momentum as the reason behind the positive share price reaction on the day.

Netwealth sees the broker opportunity ($600bn TAM) implying scope for further wins. Perhaps more importantly, Netwealth now has confidence it can sustain its FUA growth profile out to FY30 ahead of consensus.

In the past, the market has rewarded the ability of platforms to build scale.  Investors again seem willing to accept the -2 point step-down in FY27 earnings margins given the improved net flow outlook.

Netwealth also flagged a meaningful step-up in capex (almost three times FY25 levels), including replacing ageing, not-fit-for purpose technology with a modern platform, which Morgan Stanley assumes is sustained going forward.

Morgan Stanley feels the strategy of widening the feature gap versus legacy players and driving scale makes sense given Netwealth only enjoys single-digit market share. Management indicated a maximum three-year target payback on reinvestment, implying scope for further revenue upside if successful.

Morgans expects the capex investment is largely front-ended to capitalise on the broker opportunity and ultimately drive long term scale benefits from the incremental flows/revenue, which should support management’s targeted return to 50% margins over the four-year horizon.

Margin Pressure

Further out, the additional flows from Morgan Stanley (Wealth) and other potential wins should enable a solid pathway towards Netwealth’s ambition of doubling of FUA by FY30, albeit this will be slightly dilutive to revenue margins.

Flows from Netwealth’s broker offering will likely see a shift in unit economics and scale benefits compared with those traditionally seen in the company’s custody-based platform flows.  

Morgans anticipates requirements of broker-based accounts will vary and, as such, the unit economics of these deals are likely to incorporate a mix of FUA that attracts some custody, reporting and administration-based revenue (akin to Netwealth’s traditional model), as well as FUA on a flat-fee-per-account model tied to iHIN uptake.

This mix will likely place incremental pressure on revenue margins in the near term as flows composition shifts over time.

Long term, Morgans sees the potential for iHIN-based FUA to convert to higher margins over time, should they opt into the capabilities across the platform.

Attractive Valuation

Morgans views Netwealth as an attractive business, benefitting from a strong industry position, high cash generation and industry tailwinds, which have a long runway ahead. The group’s market position and long-term growth outlook are strong.

Netwealth is increasingly investing to broaden the group’s addressable opportunity within the advice market. While this brings with it a near-term trade-off to margins, this should drive sustainable flows, revenue and earnings growth over the long term.

Morgans has an Accumulate rating on Netwealth.

Ord Minnett notes the platform operator’s update conceded a weaker FY26 net flow result offset by a more confident outlook for FY27 and beyond. Management is expecting above-consensus net flows in FY27 and is aiming to double FUA over the next four years.

Meanwhile, the earnings margin is likely to resume its improvement after a dip in FY27. Combined with Netwealth’s strong returns, this outlook sees Ord Minnett upgrading its rating to Accumulate from Hold.

Macquarie notes Netwealth shares are trading at 40.2x one-year forward PE, which is -18% below the five-year average. Robust earnings growth underpinned by strong fundamentals and broker opportunity tailwinds at an attractive valuation keep Macquarie on Outperform.

The market has previously rewarded both Netwealth and rival Hub24 ((HUB)) on deals that help accelerate FUA growth, scale advantages and long-term earnings power. Hence, Morgan Stanley is not surprised by the market’s positive reaction to Netwealth’s demonstrated traction in broking and stronger outlook.

Morgan Stanley reiterates Overweight.

Citi sees Netwealth as paving the way for the next leg of growth, despite disappointing June quarter net flows. Citi retains Buy.

Bell Potter also retains Buy.

UBS, on the other hand, is hanging on to its concern over the June quarter slowdown. While the stock is now clear of margin reset risk with improved visibility over long-term growth, uncertainty still remains around the shorter-term outlook, UBS believes, as the June cyclical slowdown may persist into the September quarter.

On that basis, UBS retains Neutral, preferring Hub24 (Neutral) over Netwealth, and AMP Ltd ((AMP)) (Buy) over both in the space.

That leaves six Buy or equivalent ratings and one Hold from the seven brokers monitored daily by FNArena covering Netwealth.

The consensus price target among the seven has increased to $28.85 from $28.19.

While Canaccord Genuity also acknowledges some near-term uncertainty around the flow-through of global market volatility and recently proposed tax changes on system flows and FUA, this broker believes the share price will re-rate as management delivers against its FY27 flow guidance and margins rebuild towards 50%.

Canaccord maintains Buy and lifts its target to $28.65 from $26.35.

Netwealth’s iHIN capability, and the subsequent opportunities it opens up in the wealth management sector, help underwrite future growth, sit consistently with the company’s high net wealth heritage, and allows it to diversify away from the retail platform market, Jarden suggests, where growth has decelerated markedly.

Jarden’s earnings forecasts nevertheless reflect a more conservative view of FY30 ambitions and a lower earnings margin to accommodate further growth investment.

Jarden retains Neutral, lifting its target to $25.00 from $24.80.

Analysts at RBC Capital’s assessment shows a greater emphasis on shorter-term margin pressure. The circa -5% downgrades to FY27 and FY28 forecasts have pulled back their price target to $28 from $30.

RBC Capital has retained its Sector Perform rating.

The same observation can be made about JP Morgan’s post-event review that has resulted in reduced forecasts, with Neutral rating and $24 price target unchanged.

JP Morgan’s research update explains the $24 price target represents a -14% discount to its DCF valuation to reflect ongoing regulatory overhang and uncertainty surrounding the net flows environment.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms