Focus On Disruptor Wealth Platforms

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RBC Capital Markets sees further market share gains ahead for specialist wealth management platforms Netwealth, Hub24 and Praemium.

-RBC initiates coverage of Netwealth, Hub24 and Praemium
-Ongoing gains in market share expected
-March quarter results surprise brokers

By Greg Peel

RBC Capital Markets has initiated coverage of the three leading listed specialist digital wealth platforms Netwealth Group ((NWL)), Hub24 ((HUB)) and Praemium ((PPS)). Wealth management platforms are not themselves fund managers – they do not offer investment advice – rather digital platforms on which investors can consolidate and manage their own investments via various tools and data analytics.

They are thus most popular with higher-wealth investors and their financial advisors.

The three small “disruptors” have received a boost in recent years with the exit of banks from wealth and specialist platforms. While all three have made significant inroads, they are still dwarfed by incumbents in the field such as Insignia Financial ((IFL)), BT, AMP Ltd ((AMP)) and others which each boast 12-20% of the market, while the leading small player – Netwealth – has 7.6%.

RBC Capital sees a long runway for growth for all three smaller players, leading to increased scale and thus greater fixed-cost leverage.

Netwealth Group

Netwealth is Australia's largest and most profitable specialist platform, RBC notes, with a primarily in-house developed product and a strong focus on developing out its core capabilities. The platform has a strong track record of growth, with a four-year historical compound annual growth rate of 21% for revenues and 18% for earnings, supported by its highly rated product and service offering which was voted number one for overall satisfaction for eleven consecutive years by industry monitor Investment Trends.

RBC sees a long growth runway for Netwealth, with a full pipeline of existing clients to draw from. The broker expects market share gains to continue to be supported by the platform's accelerating share of inflows, relatively constrained outflows and the multi-year transition benefits from new advisors coming onto the platform.

Netwealth's large proportion of net inflows from existing financial intermediaries reveals the substantial opportunity to further capture a larger share for its current network, with RBC’s analysis suggesting there is additional upside to be extracted in terms of increased advisor and investor wallet penetration.

RBC believes recent reinvestment into technology, sales and marketing will act as a platform for fixed cost leverage as the business grows, given these areas are highly scalable, supporting new accounts coming onto the platform with little incremental cost to serve. The forecast is a four-year compound annual growth rate in earnings of 22%.

The current share price is nonetheless in line with RBC’s valuation, and a 46x PE multiple is in line with Netwealth’s four-year historical average. The broker thus initiates coverage with a Sector Perform rating and a $20.00 target.

Valuation is also an issue for other brokers covering Netwealth. The platform’s March quarter trading update in April showed net funds inflows above, or only slightly below, forecasts, buoyed by a strong equity market performance in the quarter and new product initiatives. But of the six brokers monitored daily by FNArena covering Netwealth, ratings are even split between two Buy or equivalent ratings, two Holds and two Sells.

Two brokers outside daily coverage – Wilsons and Jarden – are equally split Overweight/Underweight.

No-one has a bad word to say about Netwealth, and the general expectation, given management commentary, is for solid inflows in the June quarter, so it simply comes down to valuation. Targets range from $16.75 to $22.50 among daily-monitored brokers. That implies consensus of $18.76.

Citi has one of those Sell ratings, but in the wake of March quarter updates from Netwealth and Hub24 (Citi does not cover Praemium), this broker has placed a “positive catalyst watch” on Netwealth given upside risk to its June quarter inflow assumptions following management commentary.

Hub24

By contrast, Hub24 draws three Buy and three Hold ratings from the same six FNArena brokers, on a tighter target spread of $39.25 to $44.00, for consensus of $41.74. Hub24’s March quarter update similarly came in above or below forecasts.

Jarden and Moelis each have Hold or equivalent ratings, while Wilsons has a Buy. Wilsons’ target price exceeds the aforementioned range at $44.69.

For Hub24, RBC sees a long runway for growth supported by an accelerating share of inflows, relatively contained outflows and a strong opportunity to capture a larger share of its existing base through its best-in-breed product offering.

Hub24 has an experienced management team with a strong track record of delivering growth, the broker notes, boasting a four-year historical compound annual revenue growth rate of 30% and earnings of 60%. Growth has been driven both organically and through acquisition, which has strengthened the platform's position in new product verticals.

RBC expects market share gains to continue given the platform's accelerating share of market inflows, while outflows appear relatively contained compared to incumbents.

Hub24 has developed a best-in-breed product and service offering which is top-rated for advisor experience, functionality, support and product choice. This has resulted in the platform attracting new advisors, the broker notes, and winning greater share of their funds under administration wallet.

The stock trades below its average historical discount to Netwealth, its own historical trading averages, as well as its historical premium to the ASX200. RBC initiates coverage with an Outperform rating and $47.50 target.

Praemium

Smaller Praemium does not enjoy the same extent of broker coverage as its larger peers. Ord Minnett is the only daily-monitored broker covering the stock, but coverage is also provided by Canaccord Genuity, Moelis and Wilsons.

All four have Buy or equivalent ratings, with targets ranging from Ord Minnett on 55c to Canaccord on 86c.

Praemium’s March quarter trading update exceeded all four brokers’ expectations, on a combination of net inflows and market strength.

This platform leans towards the higher net worth client. RBC notes Praemium is a leading platform for the emerging and established “affluent” investor market, having built one of Australia's largest non-custodial offerings and pioneering in emerging industry products such as self-managed accounts (SMA).

RBC believes the foundations are in place to drive greater scale and profitability following the business' renewed focus on Australia’s sophisticated wealth segment with the acquisitions of Powerwrap and OneVue.

For Powerwrap, while there is the potential for further near-term volatility from elevated outflows, RBC ultimately views these risks as transitory. For OneVue, the broker believes there exists additional upside to deal metrics, if Praemium can extract revenue synergies with existing products or deliver additional funds under administration growth which would come at higher incremental margins.

Praemium expects to launch its next generation Investor Directed Portfolio Service wrap product by the first half of FY25. The new product will be a full-functioning IDPS solution designed to target affluent clients, investing around $1m, between the platform's SMA and Powerwrap businesses.

RBC believes this will be a key catalyst for inflows from new and existing clients.

RBC initiates coverage with an Outperform (Speculative Risk) rating and 65c target. The Speculative Risk caveat is due aforementioned risks which the broker views as transitory. Praemium trades at a significant discount both to its relative historical trading and average discount to key peers Netwealth and Hub24.

Shareholders in Netwealth and Hub24 have experienced a similar return since equities bottomed in late 2022, in excess of 60% ex-dividends, but that required Netwealth shares outperforming in 2024 thus far.

Shares in Praemium have lagged both noticeably and are still lagging since January 1st returning circa 14% ex-dividend, against 31% and 18% respectively for Netwealth and Hub24.

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