Netwealth ‘overvalued’ amid falling growth: Analysis

Last week, Netwealth reported to the ASX a 10.8 per cent increase in funds under administration for the June quarter.

However, an analyst note from Morningstar said that despite growth in funds under management and administration (FUMA) falling 20 per cent over the last month, it believed Netwealth’s $7.64 share price is overvalued.

While it said Netwealth’s FUMA is growing quickly, Morningstar said the investment platform market is highly competitive, and that Netwealth lacks the economic moat required to create pricing power and sustain long-term profit margins.

Further, it said FUMA growth is likely to be offset by price competition to some degree and platform fees should continue falling.

“Management said pricing pressure persisted in the quarter but Netwealth is gaining market share at ‘sustainable margins’,” Morningstar said.

“This is broadly in line with previous guidance, and our forecasts, for a stable EBITDA margin between fiscal 2018 and 2019.”

Despite a 32 per cent increase in FUMA to $27 billion in fiscal 2019, Morningstar said Netwealth’s growth was largely in line with its 30 per cent forecast.

FUMA growth slowed from 45 per cent in fiscal 2018 and expects growth will continue slowing down to 25 per cent in fiscal 2020 as the business matures.

As for Netwealth’s proportion of fee-paying funds under administration (FUA), it stabilised in the fourth quarter, which is slightly below the 61.8 per cent achieved in fiscal 2018 but well below the 69.3 per cent in fiscal 2017.

However, Morningstar said this doesn’t necessarily mean pricing has stabilised and the revenue/FUMA margin is likely to fall at a compound annual growth rate of 4 per cent over the next five years.

“Despite falling revenue margin, we’re a little surprised profit margins aren’t expanding given the reasonably fixed cost base and strong revenue growth, but expect further clarification during the fiscal 2019 results next month,” Morningstar said.

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].