The Wrap: Platforms, Insurers Managed Funds, Emerging Green Companies & Fraud

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Weekly Broker Wrap: Platform players; insurers; managed funds; emerging green companies; and investment scams.

-Target price lift for Hub24 and Netwealth Group
-Varying interpretations of business interruption insurance case win
-Australian equity investors: savvy or lacking adventure?
-Some emerging companies with disruptive green technologies 
-Beware of investment scams on multiple fronts

By Mark Woodruff

Target price lift for Hub24 and Netwealth Group

Following the Royal Commission, the early release of superannuation and covid-19, Credit Suisse is seeing confidence return to the financial advice market.

Significant demand for such advice in Australia is expected to naturally benefit platforms, which are the key tool/software used by advisers to administer their clients’ monies.

There are many structural tailwinds at play in the Australian advice market, including an ageing population, maturity of the superannuation system and intergenerational wealth transfers.

Moreover, the broker estimates around $75bn was transferred out of the accumulation phase of superannuation in FY20, with approximately 75% of this going to pension-phase accounts, which supports the growth of the platform market. Not only does this attract assets from the existing platform market, but also from industry funds, corporate super funds and SMSFs.

Credit Suisse forecasts the platform industry will grow to circa $1.8tr by FY30, versus $1tr currently. By that time both Hub24 ((HUB)) and Netwealth Group ((NWL)) could capture around 15% and 14% of the platform market (from current levels of 4% and 5%).

Using these figures, the broker estimates funds under administration (FUM) for Hub24 should be around $270bn by FY30. After allowing for a circa 8% market share of the platform market by FY25, Credit Suisse lifts its target price to $34 from $31 and retains its Outperform rating.

In the case of Netwealth Group, FUM are estimated to be around $250bn by FY30. The broker lifts its target price to $17 from $15.80 and its rating of Outperform is unchanged.

Varying interpretations of business interruption insurance case win

Morgan Stanley expects only a modest uplift in insurers’ stock prices, after a win in the second covid-business-interruption (BI) insurance industry test case. Some forecasting restraint is required, as a court appeal is set for November with a December verdict likely.

Moreover, even an outright win isn't straightforward, as payouts are complex with definition and proximity issues. In addition, the analyst cautions that policyholders are commencing independent class actions. As a result of the above, even if the appeal is won, it may take most of 2022 for insurers to attain full comfort around claims.

The analyst points out that Insurance Australia Group ((IAG)) has the most potential capital relief, compared to Suncorp Group ((SUN)) and QBE Insurance Group ((QBE)), should the win hold on appeal. Jarden agrees and sees significant upside risk to FY22 consensus forecasts for reported profit and dividends for the company. A win would allow for the release of the $320m risk margin component of its BI provision, over FY22/FY23.

Jarden feels Suncorp could enjoy similar yet proportionally smaller benefits, while QBE’s Australian BI exposure was not disclosed,. It was, however, contained on a net basis, given its reinsurance covered pandemics in FY20.

Meanwhile Macquarie remains confident insurers (particularly IAG) are over-provisioned and believes investors should expect excess capital returns in the medium term. The broker maintains its Outperform recommendation for both IAG and Suncorp, and retains a Neutral rating for QBE.

Australian investors: savvy or lacking adventure?

Australian-based managed funds gained $15.7bn of new capital from July to September, of 2021, of which $6.3bn flowed into equity funds and over $4.6bn into fixed income funds. 

These are the highest levels since funds industry consultant Calastone began producing its funds flow index in January 2019. Across all asset classes inflows doubled from the previous best quarter.

Despite 68% of the new capital being invested in funds focused on international equities, up from 61% in the second quarter, there’s still a significantly greater domestic bias when compared to UK investors, for example. They have placed more than 90% of their equity fund purchases in international equities over the last few years.

It’s possible that Australian investors are just being savvy, given favourable tax treatment for domestic Australian equities, notes the industry consultant.

Interestingly, $1 in every $4 that flowed to equity funds was directed toward funds with an ESG focus, resulting in a boost for active funds. According to Calastone, Australia has lagged a long way behind its global peers in this area over the last two years, and this may be just the beginning of the catch-up. In the UK, almost $6 in every $10 invested in equity funds in the last two years has been committed to ESG funds.

Some emerging companies with disruptive green technologies 

As a means of showcasing some disruptive green technologies, let’s now turn to some key points made by emerging companies at Morgan Stanley’s recent clean tech conference.

In traditional thermal generation, it was noted the cost of fuel is the largest variable cost, whereas capital costs are the largest for renewable power developments. 

Hence, some alternative structured financing strategies were outlined by Genex Power ((GNX)), Deloreon Corp ((DEL)) and Mpower Group ((MPR)).

The latter is developing a portfolio of non-scheduled solar plants, while Delorean is assembling a portfolio of bioenergy assets, involving the conversion of organic waste to methane. Meanwhile, Genex is delving into power generation, with a focus on pumped hydro storage.

With the objective of improving economics for green energy, a range of expensive, but niche fossil fuel applications were highlighted by participants.

Ensurance ((ENA)) presented on diesel for back-up power or heavy transport, while holding forth regarding its bid to develop green hydrogen solutions. The virtues of embedded or off-grid energy were highlighted by Hazer Group ((HZR)),  which is commercialising its proprietary methane pyrolysis process to produce hydrogen and graphite.

Elsewhere, Redflow ((RFX)) is supplying a flow battery solution to the 2MW Rialto biogas cogen microgrid in California, and sees this as a pathway to mainstream grid applications, such as frequency control.

In looking at broader sustainability, Clearvue Technologies ((CPV)) soke to a triple glazed window product with solar generation, while Rubicon Water ((RWL)) outlined software and efficiency solutions for canal irrigation systems. Carbonxt Group ((CG1) also presented on activated carbon solutions for environmental clean-ups, of which one example is the removal of mercury.

Beware of investment scams on multiple fronts

Australians lost -$115m to investment scams in the first three quarters of 2021, up from -$65m for all of 2020. The largest losses were attributable to phone usage (-$43.5m) and the internet (-$20.2m), while social networking platforms were responsible for -$17.7m.

A report issued by Finbold.com attributed increasing losses to most people utilising digital solutions to manage finances during the pandemic and a simultaneous increase in digital investment platforms.

Australian regulators note  that the scams took different shapes, citing cryptocurrencies as the most prevalent option. 

The report concludes there is a both a need to educate the public on detecting potential schemes, and a requirement to keep up to date with the increasing sophistication of schemes.

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