Company Overview: Netwealth Group Limited (ASX: NWL) is engaged in financial services to its clients, which includes managed funds, investor portfolio services, a superannuation master fund and self-managed superannuation administration services. The company’s clients and financial intermediaries can invest in a wide array of domestic and international products through its platform. It generates revenue through its platform usage and the FY20 fees split stood as – Administration fees: 53%; Ancillary Fees: 34%; Transaction Fees: 9% and Management Fees: 4%.

NWL Details

Resilient Business Performance in 1HFY21 Aided by Favourable Market Movement: Netwealth Group Limited (ASX: NWL) provides superannuation fund trustee and administration business. The market capitalisation of the company as on 01 March 2021, stood at ~$3.54 billion. The company reported an improvement in the Fund Under Administration (FUA) to $38.8 billion as on 31 December 2020, which is an increase of $10.3 billion from the previous corresponding period. This also includes a positive market movement of $1.1 billion. The net inflows under FUA stood at $9.2 billion during the 2020 calendar year, which is an increase of 36.1% compared to the pcp. The net inflows under FUA stood at $9.2 billion during the 2020 calendar year, exhibiting a robust growth of 36.1% on pcp basis. The company has also witnessed improvement in Funds Under Management (FUM) which stood at $9.3 billion as on 31 December 2020, an increase of $1.3 billion for the December quarter.

During the period, the company reported decent financial performance with an EBITDA of $40.5 million, an increase of 30.1% on the previous corresponding period. There was also an improvement in the margin performance to 56%, from 53.1% in H1FY20. NPAT grew by 34.5% to $27.6 million. Total income stood at $72.4 million, with platform revenues of $71.2 million during the period. The operating net cash flow pre-tax was at $40.5 million, which is an increase of 29.2% on the pcp. The management declared a fully franked interim dividend of 9.06 cents per share on 17 February 2021, which is payable on 26 March 2021 with an ex-dividend date of 22 February 2021. The average annualised platform revenue earned per member account increased to $1,666, up by $102 when compared to the previous corresponding period. There was also an increase in the average account size to $440,000 as on 31 December 2020, from $385,000 on 30 June 2020.

H1FY21 Financial Performance (Source: Company Reports)

Decent Rise in FUA & FUM in H1FY21: NWL reported a decent rise in FUA to $38.8 billion during the period, aided by the strong net inflows of $4.5 billion and positive market movement. FUM grew by 62% to $9.3 billion. The company has a market share of ~4.1% in the FUA segment as on September 2020. The company reported an FUA of $40.7 billion as on 15 February 2021.

FUA & FUM Performance (Source: Company Reports)

Diversification of Fee Revenue: The company diversified its revenue composition during H1FY21, with an increase in transaction fee revenue to 12% of platform revenue. There was an increase in management fee income to 5%, owing to an increase in FUM and investment products including managed accounts on the platform.

Revenue Composition During H1FY21 (Source: Company Reports)

FUA growth driven by Financial Intermediaries: NWL has been reporting improved performance in FUA, on the back of growth driven by new and existing financial intermediaries. It reported 2,982 financial intermediaries on its platform as on 31 December 2020, which is an increase of 4.9% from 30 June 2020 levels. The migration of accounts from the existing Financial Intermediaries accounted for ~83% of the FUA added during the period, whereas new Financial Intermediaries contributed ~17% of the increase in FUA.

Top 10 Shareholders: The top 10 shareholders together form around 75.15% of the total shareholding while the top 4 constitute the maximum holding. Heine Brothers Pty. Ltd.  and Leslie Max Heine Pty. Ltd.  are holding a maximum stake in the company at 47.29% and 8.25%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company has reported resilient margin performance during H1FY21. EBITDA margin stood at 55.3% during the period, an improvement from 52% in the previous corresponding period. ROE of the company was at 34.2%. The current ratio increased to 4.62x in H1FY21 from 3.13x in H1FY20. NWL reported a decrease in the debt to equity ratio to 0.01x as on 31 December 2020.

Revenue and Margin Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The Group is exposed to a variety of financial risks due to its nature of business. It is prone to credit risk, liquidity risk and market related risks, including the likes of interest rate risk and other price risks. Any change in the interest rates may affect the future cash flows or the fair value of fixed-rate financial instruments. The onset of the COVID-19 pandemic has disrupted the economic environment, and might pose a challenge for the company to continue on its profitability trend, owing to the dependence of market performance on the macro environment.

Outlook: The company believes that it is well-positioned to meet the challenges arising out of the COVID-19 pandemic and the subsequent economic disruption. It continues to benefit from the ongoing industry consolidation and expects to continue to increase its overall market share. NWL anticipates FY2021 FUA net inflows to be in the range of $8.5 billion to $9 billion, with a decent pipeline of new business and transitions. The company also expects to benefit from the growth in affluent, high net-worth and private wealth groups as its platform looks to address the unique needs of this segment with customised solutions. It plans to continue its focus for the enhancement of IT infrastructure and software, and increase the technology headcount.

Valuation Methodology: P/E Based Market Multiple Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company has a stable balance sheet, supported by a diversified composition of revenue mix from platform offerings, and decent margin profile. As per ASX, the stock of NWL is trading above its average 52-weeks’ levels of $4.800-$18.710. The stock of NWL gave a negative return of ~15.86% in the past three months and a positive return of ~72.89% in the past nine months. On a technical analysis front, the stock of NWL has a support level of ~$13.712 and a resistance level of ~$15.019. We have valued the stock using a 3-year average P/E market multiple method (considering some premium to its three years’ average P/E multiple at the back of resilient financial performance, increase in FUA, expected earnings comfort from the growth & diversification of platform revenue and an increase in the Financial Intermediaries) to FY22E consensus EPS of $0.27 and have arrived at an indicative target price of lower double-digit growth (in % terms). Considering the current trading levels, robust financial performance during H1FY21, decent increase in the FUA & FUM of the company and a stable balance sheet with the absence of borrowings, we recommend a ‘Buy’ rating on the stock at the current market price of $14.16, up by 1.215% as on March 01, 2021.

NWL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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