Netwealth: Strong Flows & Lower Margin In FY25

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Analysts raise price targets for Netwealth Group following very strong fourth quarter net fund flows and management’s buoyant outlook commentary.

-Netwealth Group’s fourth quarter flows exceed expectations
-Momentum strong as more client accounts/balances are transitioned
-Broker views vary on revenue margin compression
-Management confident on FY25 net inflow outlook

By Mark Woodruff 

Brokers remain upbeat on the outlook for Netwealth Group ((NWL)) following stronger-than-expected fourth quarter net flows and expectations for increased flows over FY25 after management noted several significant client wins are in the early stages of transitioning.

While market movements were a drag on funds under administration (FuA) in the June quarter, and a lower cash balance weighed, the market opportunity for the financial platform disruptor remains substantial, according to Ord Minnett.

Netwealth has class-leading metrics, including strong cash flow and high returns on capital, notes the broker, and continues to grow market share at a rapid rate, while the environment for new business is also on the improve.

Enabling efficient administration of client portfolios in a single location, Netwealth Group provides financial intermediaries and their clients with a wealth management platform for superannuation (Netwealth Super Accelerator) and non-super investments on the Netwealth Wealth Accelerator.

Fourth quarter net fund flows rose by 19% on the previous corresponding period to $3.6bn, representing the second highest quarter on record, and well ahead of the $3.1bn forecast by consensus.

Rising gross inflows drove Netwealth’s impressive performance, and UBS expects this momentum to continue as financial advisers transition more client accounts and balances onto the platform.

Opening of accounts is at multi-year highs (rising by 4% year-on-year to 143,300 in the quarter) and remains a very positive lead for future inflows, according to the broker.

Custodial Platform FuA also increased by 3.7% quarter-on-quarter to $87.6bn (up by 25% year-on-year) including a market movement of -$0.3bn.

This negative market movement reflects a high allocation to domestic equities (the ASX200 fell by -1.6% in the June quarter), even though other asset classes were broadly positive in the period, explains UBS.

Commenting prior to the fourth quarter update, Jarden noted how the stronger-for-longer RBA cash rate outlook over the quarter weighed on domestic investment returns.

The analysts highlighted how asset managers under Jarden’s research coverage were benefiting relative to wealth platform providers as robust global equity returns were providing an offset.

Pooled cash balances averaged 5.9% over the quarter, down from 6.4% for the first half of the financial year.

Despite these lower cash holdings and market movements weighing on revenue margins, Wilsons points out underlying flow momentum continues to build.

This broker anticipates further support for the platform’s medium-term flow trajectory as major transitions are layered-in throughout the first half of FY25, along with further competitor-forced migrations from the likes of MLC Wrap ((IFL)), CFS FirstWrap, and Asgard ((WBC)) in the coming 6-18 months.

A $100bn FuA milestone is within management’s sights, suggests Wilsons.

Revenue margin compression

While Sell-rated Citi sees upside to FY25 flows (it’s a valuation thing), and potential for consensus upgrades to medium term-earnings forecasts, Citi also sees potential downside to near-term consensus earnings forecast.

This broker points out management continues to call out a lower revenue margin partly because of administration fee tiering, and would not be surprised by some profit taking heading into the FY24 result on August 13.

Flows from major transitions were limited in the fourth quarter, highlights Wilsons, demonstrating a healthy underlying flows number.

Given fourth quarter stability, Wilsons is unperturbed by some downward pressure on revenue margins in the second half of FY24, given the impacts of a positive market movement in the second quarter of FY24 and through the second half with fee-paying FUA growing by just 3 percentage points below the 25% year-on-year increase for Custodial FUA.

Outlook

Ord Minnett suggests the outlook remains very strong for Netwealth and forecasts an EPS compound annual growth rate (CAGR) of 24% over three years.

As this broker, management noted “a number of significant transitions have commenced in Q4 FY2024. Many of these transitions are in the early stages, which provides us with a high level of confidence in the net inflow outlook for FY2025″.

Following the fourth quarter update, Netwealth Group’s average target price in the FNArena Database of four covering brokers increased to $21.66 from $18.80, suggesting just over -2% downside to the latest share price.

UBS and Morgan Stanley have Buy (or equivalent) ratings while Ord Minnett is Hold on valuation, and Citi has a Sell rating.

Outside of daily coverage, Wilsons and Jarden have Overweight and Underweight ratings, and respective targets of $23.52 and $17.30. Jarden is yet to refresh research post the June quarter update, which is also the case for Morgans and Macquarie.

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