Specialist Platforms: Good, Getting Better

This story features NETWEALTH GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: NWL

Analysts remain enthusiastic around the specialist platform sector based on an improving net flow environment.

-Strong fourth quarter flows for specialist wealth platforms
-The current environment and broker preferences
-Highlights from quarterly results
-The outlook for Hub24, Netwealth Group and Praemium

By Mark Woodruff

Specialist digital wealth platforms delivered fourth quarter inflows in the range of 20-50% above the previous corresponding period as fund flows followed the positive June half direction of financial markets.

The focus for Netwealth Group ((NWL)), Hub24 ((HUB)) and Praemium ((PPS)) now turns to profit and loss items in the August reporting season, as well as the outlook for FY25.

Netwealth Group is the largest of the three with just under 8% market share in Australia while incumbents in the field such as Insignia Financial ((IFL)), BT, and AMP Ltd ((AMP)) command around 12-20% each.

In a deviation relative to smaller peers and the incumbents, Praemium will be launching its Next-Gen IDPS platform in coming months, increasing the number of Platforms/Schemes in the market to four, highlights Wilsons. By contrast, incumbents have been consolidating their services.

Other offerings by Praemium include the Virtual Managed Account (VMA) and Virtual Managed Account Administration Service (VMAAS). The former allows financial advisers to offer their clients tailored investment portfolios that are managed on a virtual basis, while the latter extends the capabilities of VMA’s by providing comprehensive administration services.

FUA growth for these two services combined delivered 34% year-on-year growth for Praemium in the fourth quarter.

Along with reporting, Praemium’s Powerwrap platform offers advisers a broad range of investment options and tailored strategies, while the recently acquired OneVue is an investment platform designed to streamline the administration of managed funds, superannuation, and investment portfolios.

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, enabling efficient administration of client portfolios in a single location.

Hub24’s Portfolio Administration and Reporting Service (PARS) is designed to provide comprehensive administration and reporting solutions for financial advisers and their clients. Hub24 also has a separate platform and products from the acquisition of Class Ltd in early-2022.

The current environment and broker preferences

Based on the fourth quarter updates by Hub24 and Netwealth Group, Ord Minnett ventured the net flow environment across the platform sector is good and getting better.

Under research coverage by UBS on Australian wealth platforms, Buy-rated Netwealth is the preferred exposure given a clean organic growth profile, high revenue margins, and cash profitability.

Hold-rated Hub24 has also impressed this broker after delivering strong adviser onboarding and funds flows numbers in recent quarters.

The only concerns around both these players, suggest the analysts, are recent share price rallies in anticipation of strong FY24 results.

While UBS prefers Netwealth, Bell Potter leans toward Hub24 as it looks cheap relative to other high growth specialist platforms, and the outlook for principal net flows should underpin incremental earnings growth. 

This broker’s preference is predicated on Hub24’s large exposure to superannuation assets and ability to deliver on complex integrations.

While Praemium’s fourth quarter update broadly met Wilsons expectations on FUA, greater Powerwrap outflows continued to lend a headwind, which is set to continue for another six months.

Highlights from recent fourth quarter results

Praemium’s highest revenue margin segment, SMA, continued strong levels of gross inflows in the fourth quarter, partially offset by seasonal June minimum pension drawdowns in advance of financial year-end, explains Moelis.

Ord Minnett also highlighted larger-than-expected Powerwrap Platform outflows, while the SMA Platform did not grow as fast as the broker had forecast.

Overall net flows of -$414m in the quarter were well below the broker’s $50m forecast. By platform, the OneVue outflow of -$126m was in line with the broker’s forecast, but net flows for SMA and Powerwrap of $149m and -$437, respectively, compared to estimates of $340m and -$190m.

As a result of these larger-than-expected outflows, group FUA of $28.1bn as at June 30 came in below Ord Minnett’s $28.8bn forecast.

Hub24 achieved fourth quarter Platform net flows of $5.0bn (in line with the forecast by Moelis), which included $1.8bn from the large Equity Trustees (EQT) transition portfolio.

Management is in the process of migrating customers of Equity Trustees onto its platform and noted the aggregate size had increased to $5bn from $4bn with the value uplift coming outside of market movements.

Platform funds under administration closed the quarter at $84.4bn (including a negative -$0.3bn market movement), noted the analyst. It’s felt management remains on track to meet its Platform FUA target range of between $92-100bn for FY25.

Jarden suggests this target may even be exceeded given stronger underlying net flows and the upsized Equity Trustees migration, which is on track for completion in the first half of FY25. Based on both these positives, Citi upgraded its FY25 net flow forecast for Hub24 by 11% to $14.6bn.

Brokers remain upbeat on the outlook for Netwealth Group 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.

For a more detailed review of these results and the outlook for Netwealth please refer to (Netwealth: Strong Flows & Lower Margin In FY25 – FNArena.com).

Outlook

A re-acceleration in Praemium’s earnings and profitability will occur in FY25, according to Wilsons, due to the annualisation of price increases, diligent cost control, and the extraction of OneVue synergies.

This broker suggests the Praemium share price is due for a re-rate as the market gains increased confidence in the earnings outlook.

Ord Minnett agrees the OneVue integration and the new IDPS launch will offer opportunities to reinvigorate growth in time. However, the SMA platform is not currently providing sufficient momentum to offset outflows from other areas of the business, with Escala-related redemptions persisting longer-than- anticipated.

As net flow headwinds are likely to persist in the near-term, this broker downgraded Praemium to Hold from Buy.

Within the FNArena database, Ord Minnett has a 50c target price for Praemium. Outside of daily coverage Moelis, Wilsons and Canaccord Genuity have Buy (or equivalent) ratings and an average target of around 69c, which suggests around 44% upside to the latest 48c share price.

For Netwealth, Jarden sees tailwinds to the net flow outlook given strong new account growth in the fourth quarter and large transitions flagged for FY25.

There are six brokers covered daily in the FNArena database with two Buy (or equivalent) ratings, two Holds and two Sell ratings, and an average target price of $20.64 suggesting just over -13% downside to the latest share price.

Outside of daily coverage, Jarden and Wilsons have Underweight and Overweight ratings, respectively, with targets of $17.75 and $23.52.

Seven brokers are covered daily for Hub24, generating three Buy and four Neutral ratings with an average target of $45.73, suggesting -8.50% downside to the current share price.

Moelis, Jarden and Wilsons all have Hold (or equivalent) ratings and an average target price of $47.77.

Netwealth Group and Hub24 report FY24 results on August 13 and 20, respectively, while the reporting date for Praemium remains unknown at this point.

Investors should keep in mind that as the companies mentioned report their financials in August, analysts will update their modeling and review valuations and price targets too.

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