2 companies quickly taking over the incumbents

If there was an underdog story in corporate Australia that could rival the battle between David and Goliath, it has to be the sweeping success of wealth management platforms Netwealth (ASX: NWL) and HUB24 (ASX: HUB) versus the major banks. 

In a world where players like BT Panorama and AMP once reined, independent small players have knocked out the competition to become the fastest-growing platform players in wealth management. 

They still have far fewer assets under management (AUM) than the competition, but therein lies the opportunity. 

Here, Wilson Asset Management's Sam Koch takes investors through Netwealth and HUB24's latest full-year results, outlines the long-term opportunity in these players, and shares which of these companies he would be buying today. 

Netwealth Key Results 

• NPAT of $83.4 million vs FactSet estimates of $85.5 million 
• Total income of $255.2 million vs FactSet estimates of $257.5 million 
• EBITDA of $124.7 million vs FactSet estimates of $127.1 million
• Final DPS 14.0c vs year-ago 13.0c

HUB24 Key Results 

• Underlying NPAT of $67.8 million vs FactSet estimates of $67.8 million
• Revenue of $327.4 million vs FactSet estimates of $328.3 million
• Underlying EBITDA of $118.0 million vs FactSet estimates of $118.1 million
• Final DPS 19.50c vs year-ago 18.50c

1. What were the key takeaways from these results?

There were three key takeaways for us from these results. One, is the net flows demonstrate that the structural growth of these businesses is still intact. Two, is that revenue margins were under pressure in the second half FY24, but there are reasons for that. And then three, there's clear operating leverage coming through each of these businesses for HUB24 and Netwealth as they continue to scale into the market opportunity that's in front of them.

2. Were there any surprises in these results that you think investors should be aware of?

For us, it was the strength of the net flow environment for both of these businesses over the last six months and even the recent trading updates that they provided in July and August. These results are well ahead of what they've historically achieved and well ahead of market expectations going in.

We are seeing these increased flows as a result of the combination of buoyant market conditions and an acceleration of the structural growth thematic that HUB24 and Netwealth are playing into and continue to win from incumbent players like IOOS, AMP, BT Panorama and even Macquarie to an extent. 

3. Would you buy, hold or sell NWL and HUB on the back of these results?

• HUB24 rating: BUY
• NWL rating: HOLD

We hold HUB24 and we'll continue to do so as long as they continue to execute as they have been. HUB24 is cheaper than Netwealth, has more room to grow in funds under administration and has more room to expand margins. If it continues to be weak off the back of these results or any other market movements in the future, we will continue to accumulate. 

4. Are there any risks investors should be aware of?

These stocks are both trading at 52-week all-time share price highs. There is increasing risk around expectations for future growth that need to be managed and well understood by investors. 

Should we see an environment where the net flows are more subdued, either thanks to sentiment around capital markets or advisers and clients not putting as much money on the platform as they were before, that would also be a risk. 

In terms of interest rate risk, both of these businesses make a cash margin on cash maintained on the platform. So there can be risks associated with interest rate cuts, but I would counter that by saying that typically, in a lower interest rate environment you'll have higher markets and more trading activity. So, in our view, it nets out. 

5. From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

Rating: 3

I'm going to rate it a three and the only reason I say that is there's a big divergence between the recent winners and the recent losers within the market. There's a lot of value out there in traditional cyclical parts of the market that have been forgotten and left behind and then there are a lot of companies that are trading at 52-week, all-time highs. So, I would say middle-of-the-road, three for now.