Netwealth Group IPO - Fast Growth Has Been Getting Faster

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

We are initiating coverage of <a href="https://www.smartkarma.com/entities/25951" target="_blank" data-smartkarma-citation="entities:25951:1">Netwealth Group Ltd (NWL AU)</a> with a AUD 5.00 fair value estimate, a no-moat rating, and a high fair value uncertainty rating. Netwealth provides investment administration software as a service, or SaaS, in Australia via its proprietary platform. We expect the company to continue to quickly grow funds under advice, or FUA, on its platform and increase its market share to 5% from around 2% over the next decade. However, Netwealth has numerous competitors with similar offerings and customer switching costs are low, and we forecast the strong FUA growth to be offset by fee compression. At the current market price of AUD 6.20, we believe Netwealth shares are significantly overvalued.Netwealth operates in a commoditised industry with a number of independent investment management platform competitors including: <a href="https://www.smartkarma.com/entities/12336" target="_blank" data-smartkarma-citation="entities:12336:1">Hub24 Ltd (HUB AU)</a>; <a href="https://www.smartkarma.com/entities/9360" target="_blank" data-smartkarma-citation="entities:9360:1">Praemium Ltd (PPS AU)</a>; <a href="https://www.smartkarma.com/entities/24327" target="_blank" data-smartkarma-citation="entities:24327:1">Onevue Holdings Ltd (OVH AU)</a>; <a href="https://www.smartkarma.com/entities/12161" target="_blank" data-smartkarma-citation="entities:12161:1">Managed Accounts Holdings Ltd (MGP AU)</a>; and Powerwrap (unlisted). Further, Netwealth competes with platforms owned by the large vertically integrated wealth management firms including: the <a href="https://www.smartkarma.com/entities/444" target="_blank" data-smartkarma-citation="entities:444:1">Westpac Banking Corp (WBC AU)</a> owned BT Financial; <a href="https://www.smartkarma.com/entities/14" target="_blank" data-smartkarma-citation="entities:14:1">Commonwealth Bank Of Australia (CBA AU)</a> owned CFS; <a href="https://www.smartkarma.com/entities/15" target="_blank" data-smartkarma-citation="entities:15:1">National Australia Bank Ltd (NAB AU)</a> owned MLC; <a href="https://www.smartkarma.com/entities/678" target="_blank" data-smartkarma-citation="entities:678:1">AMP Ltd (AMP AU)</a>; <a href="https://www.smartkarma.com/entities/310" target="_blank" data-smartkarma-citation="entities:310:1">Macquarie Group Ltd (MQG AU)</a>; and <a href="https://www.smartkarma.com/entities/12349" target="_blank" data-smartkarma-citation="entities:12349:1">IOOF Holdings Ltd (IFL AU)</a>. Collectively, these vertically integrated firms comprise 85%, in contrast to Netwealth’s market share of around 2%. Platforms largely compete on functionality, customer service, and price but rarely have exclusivity with their financial advisor customers and the average financial advisor uses two or three different platforms. Netwealth’s lack of competitive advantages and the commoditised nature of the industry in which it operates means we don’t believe it has an economic moat.Our fair value estimate implies a fiscal 2018 dividend yield of 1.4%, and a P/E ratio of 43. We expect Netwealth to increase its FUA by a CAGR of 20% over the next decade as the company wins market share from a relatively low base. However, fee compression is likely to offset FUA growth and we forecast a revenue CAGR of 15% over the same period. Our valuation is derived using a discounted cash flow model with a weighted average cost of capital of 9.0%. The capital-light nature of Netwealth’s business model means we expect the balance sheet to remain debt-free for the foreseeable future.Analysts: Gareth James and Angus Hewitt

We are initiating coverage of Netwealth Group Ltd (NWL AU) with a AUD 5.00 fair value estimate, a no-moat rating, and a high fair value uncertainty rating. Netwealth provides investment administration software as a service, or SaaS, in Australia via its proprietary platform. We expect the company to continue to quickly grow funds under advice, or FUA, on its platform and increase its market share to 5% from around 2% over the next decade. However, Netwealth has numerous competitors with similar offerings and customer switching costs are low, and we forecast the strong FUA growth to be offset by fee compression. At the current market price of AUD 6.20, we believe Netwealth shares are significantly overvalued.Netwealth operates in a commoditised industry with a number of independent investment management platform competitors including: Hub24 Ltd (HUB AU); Praemium Ltd (PPS AU); Onevue Holdings Ltd (OVH AU); Managed Accounts Holdings Ltd (MGP AU); and Powerwrap (unlisted). Further, Netwealth competes with platforms owned by the large vertically integrated wealth management firms including: the Westpac Banking Corp (WBC AU) owned BT Financial; Commonwealth Bank Of Australia (CBA AU) owned CFS; National Australia Bank Ltd (NAB AU) owned MLC; AMP Ltd (AMP AU); Macquarie Group Ltd (MQG AU); and IOOF Holdings Ltd (IFL AU). Collectively, these vertically integrated firms comprise 85%, in contrast to Netwealth’s market share of around 2%. Platforms largely compete on functionality, customer service, and price but rarely have exclusivity with their financial advisor customers and the average financial advisor uses two or three different platforms. Netwealth’s lack of competitive advantages and the commoditised nature of the industry in which it operates means we don’t believe it has an economic moat.Our fair value estimate implies a fiscal 2018 dividend yield of 1.4%, and a P/E ratio of 43. We expect Netwealth to increase its FUA by a CAGR of 20% over the next decade as the company wins market share from a relatively low base. However, fee compression is likely to offset FUA growth and we forecast a revenue CAGR of 15% over the same period. Our valuation is derived using a discounted cash flow model with a weighted average cost of capital of 9.0%. The capital-light nature of Netwealth’s business model means we expect the balance sheet to remain debt-free for the foreseeable future.Analysts: Gareth James and Angus Hewitt

Initiating on Netwealth with a AUD 5.00 FVE and a No-Moat Rating