Netwealth’s second quarter update was surprisingly strong, with funds under administration (FUA) rising by 50 per cent versus the prior year to $28.5 billion, Morningstar said in an analyst note.
The advice platform’s FUA net inflows for the first half of FY19-20 was at $4.4 billion, an increase of $2.4 billion (124.9 per cent increase) compared to the same period in FY18-19 and $2 billion (81.6 per cent increase) compared to the second half of FY18-19.
But despite the better-than-expected FUA inflows in the first half and an increase in FUA guidance to over $32 billion by June 2020, from $30 billion previously, Morningstar said price weakness means fiscal 2020 earnings guidance has been maintained.
“This means the EBITDA margin is still likely to fall in fiscal 2020 as we forecast, indicating a lack of operating leverage and strong expenses growth as the firm works harder to maintain its leading industry position,” the research house said.
Even though Morningstar increased its FUA forecasts following Netwealth posting its second quarter result, it said the increase isn’t sufficient to warrant changing its $5.70 fair value estimate.
“The lack of earnings growth, despite very strong FUA growth, appears to support our investment thesis, that the lack of an economic moat coupled with price-based competition poses a long-term challenge to the business,” Morningstar said.
“Unsurprisingly, the market reacted negatively to the announcement, pushing the shares down 3 per cent to $7.78. The stock remains significantly overvalued.”
