Netwealth’s imperious march into the FUA territory of the traditional platforms is unimpeded. But the support troops behind the front line are scampering to keep up, adding cost to the campaign and this is worrying investors – unnecessarily, in our view.
NWL’s 1H22 result missed market expectations. The company had honestly flagged an increase in strategic investment in the cost base at the FY21 result last year, but the outcome was more than the market had anticipated. Management is suggesting this cost growth will moderate from FY23f and with the RBA likely to lift cash rates this year, we think NWL’s EBITDA margin will get back to its historical low-50’s range in FY23f.
NWL’s 1H22 EBITDA of $43.8 million (excluding share-based payments) was in-line with consensus forecasts. The 34% growth in operating expenditure (mostly personnel) appeared to spook the market and more than offset the already better-than-expected revenue growth of 17%. That was a recipe for a negative share price reaction which has fallen some 25% since the start of the year.
The cost base increase was fairly chunky in comparison to FY21 (+11%) and highlights NWL’s intention to capitalise on the market opportunity while preparing for a competitive response from the legacy platforms. NWL has already established a beachhead with its superior platform functionality, and this is helping to distinguish it as a higher value proposition. The planned launch of a non-custodial administration and reporting solution in 4Q22 is further evidence of NWL’s progress and, coincidentally, seems to signal its lack of interest in Praemium.
Considering the big increase in the cost base in FY22f, we would expect the effort to moderate in FY23f. However, we would not anticipate the heady 56% operating margins seen in 1H21 to be breached again.
NWL’s new cash management arrangement comes into effect in March 2022, at which point the cash margin will decline to about 60bp from 105bp. But as the RBA seems intent on lifting the cash rate in CY22, it becomes less likely that NWL will suffer a 60bp cash margin for too long. Indeed, a 50bp RBA cash rate bump would potentially restore NWL’s 105bp cash margin by FY24f.
Investment view
FY22f is turning out to be a staging point before the next assault on legacy platform FUA gets underway. NWL remains one of the top-rated platforms and the pace of net inflows confirms the structural shift towards specialist platforms is winning the war.
Risks to investment view
The growth in FUA could be stifled by a strong competitive response from the legacy platforms.
Recommendation
We have upgraded our recommendation to Buy from Hold following the recent share price decline.
