Company Overview: Netwealth Group Limited (ASX: NWL) is engaged in the provision of financial services, which includes managed funds, portfolio services, a superannuation master fund, etc., to financial intermediaries and investors. It was founded in 1999 in Australia and is one of the leading wealth management businesses in the country. The company operates a digital platform through which financial intermediaries and clients can invest and manage a wide array of domestic and international products.

NWL Details

Uptick in Q3FY21 Performance Aided by Decent Fund Inflows: Netwealth Group Limited (ASX: NWL) provides a platform for superannuation and non-superannuation products to financial intermediaries and clients. The market capitalisation of the company as on 10 May 2021, stood at ~$3.27 billion. The company reported an increase in the number of accounts to 92,008 as of 31 March 2021, a growth of 4.3% for the quarter.

During the quarter ended March 2021, the company reported impressive growth in Funds Under Administration (FUA) to $41.8 billion. This reflected an increase of ~$3 billion for the March quarter, which includes a market movement of $0.8 billion. The FUA grew by ~50% on the previous corresponding period, aided by the positive market movement of ~$5.7 billion during the period. NWL reported FUA net inflows of $2.3 billion for the March quarter and $6.7 billion in the year to date (i.e., 1^st July 2020 to 31 March 2021). Funds Under Management (FUM) stood at $10.5 billion as of 31 March 2021, with FUM net inflows of $0.9 billion during the period. There was also decent increase in the managed account balance to $8.7 billion as of 31 March 2021, reflecting a growth of $3.7 billion on the pcp.

FUA & FUM Performance (Source: Company Reports)

Decent H1FY21 Performance: The company delivered decent performance during the period and reported a 30.1% increase on the EBITDA to $40.5 million on the prior corresponding period. There was also an improvement in the EBITDA margin to 56%, up by 2.9% on the pcp. NPAT grew by 34.5% to $27.6 million in H1FY21, compared to $20.5 million in H1FY20. The total income stood at $72.4 million during the period, an increase of 23.4% on the pcp. It ended the period with a cash position of $82.5 million as of 31 December 2020, with the absence of debt on the balance sheet. On the back of robust performance, the management decided to declare an interim dividend of 9.06 cents per share for the period and paid on 26 March 2021.

H1FY21 Financial Performance (Source: Company Reports)

Split of Platform Revenue: In H1FY21, the company has diversified its revenue stream and reported an increase in the transaction fee revenue contribution to 12% of platform revenue, compared to 6% in H1FY20. There was also an increase in the management fee income to 5% of platform revenue, owing to an increase in FUM and investment products, which includes Managed Accounts on the platform.

Revenue Mix (Source: Company Reports)

Growth in Platform Performance: The company reported for the eleventh consecutive quarter the largest FUA net inflows of $9.2 billion for the 12-month rolling period to 31 December 2020. It also witnessed the largest quarterly FUA net inflows of $2.6 billion for the quarter ending December 2020. As a result of the decent fund inflows, the company saw its market share increase to 4.3% as of 31 December 2020, up by 1.1% for the twelve months to 31 December 2020.

Top 10 Shareholders: The top 10 shareholders together form around 75.10% 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: During H1FY21, the company delivered decent margin performance complementing its improved financial metrics for the period. EBITDA margin improved to 55.3% in H1FY21, compared to 52% in H1FY20. There was also an improvement in the net margin to 38.8%, from a level of 35.8% during the same period under consideration. The ROE of the company stood at 34.2% during the period, an increase from a level of 30.9% in the prior corresponding period.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The Group is exposed to the interest rate risk, as it holds a considerable amount of amount in the balance sheet as cash and equivalents. It is also prone to other price risks, given that the fair value of future cash flows of a financial instrument may fluctuate because of changes in market prices due to demand and supply factors. The company has also been impacted by the onset of the COVID-19 pandemic, as it disrupted the way of conducting business. Its line of business also exposes it to the risk of volatility in the equity markets due to probable shifts in the macroeconomic environment.

Outlook: NWL expects to continue on its decent performance and anticipates full year FUA net inflows to be approximately around $9 billion. In addition to its growth in market share, the company expects to benefit from an increase in affluent, high net-worth and private wealth groups. The company has transitioned to a new pricing policy effective 1 January 2021, and it is in the process of bringing all its clients under the new pricing regime. It plans to continue to invest in its IT infrastructure and software and enhance operational efficiency and scalability. It also plans to build synergy with Xeppo and other 3^rd party software solutions to create and deliver a unique proposition for integrated wealth management practices.

Technical Overview: After correcting from an all-time high of AUD 18.71 touched in January 2021, NWL found support level at around AUD 12.88. This implies that the stock remains in an intermediate uptrend on the weekly chart. Moreover, the price is trading above its 100-period simple moving average (SMA), acting as a crucial support level below the rising trend line. The momentum oscillator RSI (14-period) is trading near an oversold zone (i.e., ~42.38 level), a rebound from here may push the price higher towards the resistance level at AUD 15.295.

Weekly Chart (Source: Refinitiv, Thomson Reuters)

Note: The purple color line in the chart shows RSI (14-period) and the yellow color line represents trend line. The red color line represents 100-period SMA.

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: As per the company, it is the 7^Th largest and one of the fastest-growing platform providers in Australia. As per ASX, the stock of NWL is trading above its average 52-weeks’ levels of $7.280-$18.710. The stock of NWL gave a positive return of ~3.67% in the past nine months and a negative return of ~3.700% in the past one month. We have valued the stock using a 3-years average P/E multiple (considering some premium due to decent increase in the FUA levels, rise in the number of accounts and strong balance sheet) to FY22E consensus EPS of $0.260 and have arrived at a target price of lower double-digit (in % terms). Considering the expected upside in valuation, impressive financial performance in H1FY21, decent increase in FUA and FUM levels in the March 2021 quarter and an increase in the market share of the company, we recommend a ‘Buy’ rating on the stock at the current market price of $13.270, down by 1.192% as on May 10, 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.