NWL - FY21 Results

Netwealth FY2021 Result

Netwealth, a holding in the ELMRI ANZ Conviction Fund reported their FY2021 results. They were broadly in line with expectations, with NPAT growing +24% year on year.  The company was initially sold off with some concerns over margin compression, which was mainly due to the repricing of existing clients to bring them inline with the rates offered to entice new clients and ongoing absorption of the RBA rate cut. Management confirmed that they are not expecting a material change to the admin fee margin in FY22, with the recent repricing now having cycled through since January 2021 for all clients.

Outlook commentary flagged a strategic increase in spend during FY22 which may impact EBITDA margins in the near term, however this should normalise from FY23 onwards. The elevated investments are centred around building out their technology team and infrastructure capabilities. Management believes that these strategic investments will position the company to capture the very large market opportunity in ‘off platform’ assets (estimated at $2T vs $900B in ‘on platform’) and allow them to continue to cater for the growth they have been experiencing in their core investments platform.

Opportunity

Netwealth is the largest of the independent wealth management platforms and 6th largest overall with a 4.6% market share. The broader structural opportunities for emerging wealth platforms remain robust, with a shift away from the large, integrated incumbent providers due to under-investment in new technology, functionality, and general perceptions of low customer service levels. This has resulted in large outflows which has allowed Netwealth to continuously to take share from larger market incumbents, receiving the largest net fund flows for 13 consecutive quarters.

The investments made today will continue to allow Netwealth to scale their platform both in existing and new revenue streams, such as their ‘off platform’ assets solution Xwrap which adds further functionality to the ecosystem, helping them retain existing and attract new clients.

Valuation Upside

We believe Netwealth’s current valuation underappreciates its very large and growing addressable market opportunity and the companies strong cash generation qualities (98% conversion of EBITDA) with no debt. The initial selloff following their result appears to be short sighted, and overlooks the scalability of the enhanced platform, its increased functionality and its potential to continue to lure and win new clients.

This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).

The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.

This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.

ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.

Past performance is for illustrative purposes only and is not indicative of future performance.