Has Netwealth Been Punished Enough?

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The company is included in ASX200, ASX300 and ALL-ORDS

Wealth management platform Netwealth was heavily de-rated amidst heightened March quarter volatility. Has value now emerged?

-Netwealth’s fall outpaces the market
-Platform nevertheless sees net inflows
-Structural story intact
-Market risk nonetheless remains

By Greg Peel

What has been lost on some investors, suggested Ord Minnett last week, and which has been highlighted by recent wild market movements, is that specialist financial platform operators should be viewed as market cyclicals, implying fund flows and funds under administration metrics and valuation multiples are inextricably linked to broader market sentiment.

The evidence would appear to bear Ord Minnett’s assertion out.

The ASX200 hit a peak in mid-February post a rally driven by Donald Trump’s November election win following promises of US tax cuts and market deregulation, leading to an assumption “animal spirits” would be rekindled in Trump’s second term. Sentiment was swift to change nevertheless when the threats of tariffs previously brushed off by the market as campaign bluster became more frighteningly real.

By the end of March, the ASX200 had fallen -10% from its peak. Shares in wealth management platform Netwealth ((NWL)) fell -20% over the same period. Following “Liberation Day” on April 2, when stiff tariffs were imposed by Trump on everyone from allies to penguins, the ASX200 fell further to be down -14.5% from said peak. Netwealth shares notched up a -30% fall.

The tariff “pause” Trump announced a week later, due to a collapsing US bond market, sparked a sharp rebound, which had by last week returned both the ASX200 and Netwealth to pre-Liberation Day levels still down, but not as precariously so.

One might assume funds managers of any form would have, since mid-February, seen a rush to the exits of funds under administration. But that was not specifically the case for Netwealth.

Weathering the Storm

Over the March quarter, Netwealth saw funds under administration grow by 23% year on year. The platform did not see a net exit of funds, rather booked $3.5bn of net inflows. This was in line with prior consensus expectation. FUA was nonetheless hit by a -$1bn fall in market value due to noted volatility over the period, which was greater than expected.

Netwealth suffered limited revenue margin impact from recent market volatility, Morgan Stanley notes, given high levels of recurring revenue and diversified models for revenue (higher trading volumes and cash balances) and portfolios (multiple asset classes).

There was still some flight to safety apparent, but Netwealth allows investors to move into cash within its platform. The amount of FUA held as cash lifted to 5.8% by end-March compared to 5.5% at end-December.

That cash balance has continued to increase in April to date, during the tariff collapse and tariff pause rebound period, but so too has Netwealth’s funds flow momentum continued, which points to transitions of funds to the “disruptor” platform continuing despite market volatility, Citi notes.

With revenue margin benefits from higher trading activity helping to offset higher cost growth, Jarden believes Netwealth will be able to sustain around 50% earnings margins into end-FY25 and beyond.

Management is certainly confident, extending its net flow guidance into FY26 for the first time, noting the June quarter, now underway in FY25, is seasonally strong for net fund flows.

Not Without Cost

Further reiteration of a focus on reinvestment in FY26 was also provided in the March quarter update with small increments additionally added to R&D capitalisation as Netwealth reduces reliance on third-party systems.

While FY25 is well understood to be a stronger year than usual for reinvestment, consensus had been “grappling”, suggests Wilsons, with whether FY26 would be a normalisation period or Netwealth would continue to “double down”.

The update provided a clear indication it is expected to be the latter, Wilsons believes, with Netwealth clearly confident in its medium-term outlook.

While management reiterated FY25 cost growth guidance (up 5% half on half in the second half), the update also mentioned “the level of investment will continue in FY26”. In Cit’s view, this flags upside risk to cost growth and the broker has upgraded its cost growth to 15% year on year in FY26, with earnings margins flat year on year at around 50%.

Citi sees current consensus for an earnings margin of 52% in FY26 as too high, which reflects downside to revenue (given market weakness) and slightly higher costs.

Bulletproof?

Ord Minnett is sticking to its guns in warning funds management is inextricably linked to market sentiment. To that end, given current uncertainty, Ord Minnett believes FY25 and FY26 price-to-earnings multiples of circa 50x or more for both Netwealth and rival Hub24 ((HUB)) are unsustainably high given their linkage to market sentiment, hence downgrades have followed to the broker’s recommendations and target prices.

Netwealth has moved to Lighten from Accumulate and Hub24 ((HUB)) to Lighten from Hold. More striking are the broker’s target price cuts. Netwealth’s target moves to $15.40 from $33.00.

Ord Minnett is nonetheless at pains to point out it still views Hub24 and Netwealth as first-class companies with sound business models which will continue to benefit from changes in market structure that are driving increased uptake of the specialist investment platforms over in-house administration systems.

Meanwhile, Morgan Stanely has upgraded Netwealth to Overweight from Equal-weight, while trimming its target to $29.75 from $31.25.

Morgan Stanley views Netwealth’s underperformance compared with the ASX200 since February peaks as an opportunity to a buy a structural growth story, for which the broker’s long-term thesis remains intact.

The platform enjoys structural tailwinds as advisers migrate from incumbent platforms to specialist platforms like Netwealth, which has only an 8.5% share of total FUA. Morgan Stanley sees no reason why Netwealth can’t get to 15-20% market share over time.

That said, Morgan Stanley warns net inflows could moderate, as advisers can find it more difficult to transition portfolios to alternative platforms in periods of market weakness, given clients are more focused on portfolio returns.

There is otherwise a general risk of higher competition in the form of pricing pressure, more product innovation and better service levels, Morgan Stanley suggests, and PE multiple compression if we see a further rotation away from growth names to value/defensive names.

Wilsons believes Netwealth’s March quarter update was once again a clear demonstration of the business’ quality and the platform’s model. Wilsons retains Overweight, with a $27.66 target.

Wilsons’ thesis remains one of an abundance of opportunity amidst peer-forced migrations continues with advisers increasingly looking to favour platform solutions. Netwealth, the broker believes, is exceptionally well placed to capture this opportunity.

Although Jarden anticipates global trade tensions will weigh on the stock given high market sensitivity, this broker believes the de-rating of Netwealth to historical 12-month forward PE levels provides some margin of safety for investors. As such, with strong structural growth drivers from market share gains and broader superannuation tailwinds, Jarden upgrades Netwealth to Neutral from Underweight.

Jarden’s target falls to $24.30 from $24.95.

Bell Potter views Netwealth’s return to an historical PE level differently. In the absence of meaningful earnings upgrades, Bell Potter reiterates its Hold recommendation, with value dissipating on the sharp, tariff-pause driven recovery in the share price, noting Netwealth is again trading in line with historical average multiples while presenting similar double digit revenue growth.

Bell Potter nevertheless raises its target to $26.40 from $25.80.

Citi, too, increases its price target, to $27.30 from $26.50, while retaining Buy.

Macquarie has cut its earnings forecasts for Netwealth to reflect market movements and slightly moderated flow assumptions, cutting its target to $28.40 from $33.90. Macquarie retains Neutral.

UBS also retains Neutral, cutting its target to $28.00 from $29.00.

Whilst further volatility amongst all financial services stocks is likely, says Morgans, (stocks still highly susceptible to short-term pullbacks), value has increased across both the structural growth and value names.

Morgans rates Netwealth Hold, with a $29.00 target.

Among the seven brokers monitored daily by FNArena, there are now two Buy or equivalent ratings, four Hold and one Sell. The average target among those brokers is $26.54, but we note that while six of those broker’s targets are relatively bunched between Bell Potter’s $26.40 and Morgans’ $29.00, Ord Minnett’s $15.40 rather impacts the average.

Wilsons and Jarden are both on Buy equivalents, with targets spread from Jarden’s $24.30 to Wilsons’ $27.66.

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