Netwealth could capture 10% market share

Netwealth operates in a growing market, and is taking share rapidly from a low base. There is a clear trend away from bank-owned platforms, which we expect will strengthen following the Royal Commission.

The largest five platforms (bank owned) have roughly 80% of the market between them, and are losing share gradually. Netwealth has proven technology and a strong reputation for service, and benefits from being independent of the large banks.

With only 2% market share, we believe there is scope for Netwealth to grow rapidly for a number of years. And notwithstanding the expectation of a flat margin in FY19, we see scope for margins to rise over the medium term.
 

If we look out over a 5-10 year period, there is scope for Netwealth to capture maybe 10% of the market. If this occurs, the business will grow five-fold, with strong operating leverage. Hence profits could be well over five times larger than current numbers.

Overall, Monday's result was largely in line with expectations, although the 5.2c special dividend was a pleasant surprise. Our long-term investment case has not changed dramatically, notwithstanding some slippage in short-term forecasts due to the reinvestment in FY19.

Three notable takeaways from Monday's result are:

• The rapid growth in funds under administration (FUA),
• The appearance of slight revenue margin decline, and
• The expectation that rising costs next year would erode operating leverage in the shorter term.

Netwealth ended the year with $18bn in FUA, which was up 41% over the 12 months and 18% above prospectus forecasts. The company now has 2% of the total platform market, however is garnering 22% of net flows into the system.

Revenue margin fell 12% to 0.53%, which would usually be a bad sign, however given the rate of growth in FUA, does not necessarily illustrate an industry suffering irrational price competition. The primary driver of this lower reported margin is the fact that Netwealth provides fee caps. So as account balances grow, revenue does not necessarily grow at the same rate. Company revenue grew 36% notwithstanding this apparent slip in margins. Operating earnings (ie after fixed costs) showed very strong margin growth from 40.7% to 50.8%.

For FY19, Netwealth management expressed confidence in continued strong growth in FUA, however, warned that operating profit margins would likely be flat due to a reinvestment in the business. Given the high valuation of the stock based on shorter-term forecasts, this resulted in a 7% fall in the share price.
 

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