Financial Services - Platforms: expecting solid 4Q20 FUA levels
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Date posted:
- 02 July 2020, 2:40 PM
- Sectors Covered:
- Contractors/Developers, Consumer, Diversified Financials
- We mark to market forecasts for NWL and HUB.
- A stronger than expected 4Q20 market performance leads to higher FUA levels heading into FY21 and we expect will lead to consensus forecast upgrades.
- We expect 4Q20 net inflows to remain solid for both companies, supported (in part) by the lag from recent adviser wins and a seasonally stronger fourth quarter.
- We view NWL as a high-quality business, although fully valued at current levels. We retain an Add recommendation on HUB.
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Market recovery over 4Q20 supportive for FY21 starting FUA
The ASX200 has recovered ~16% in the 4Q20 and is down ~12% for 2H20. Given asset mix, platform FUA doesn’t capture the full move with 3Q20 updates highlighting that both groups’ FUA captures ~55% of the ASX200 performance. The Mar-20 RBA rate cut lowers the earnings margin on pooled cash in 4Q20 and FY21 will face the full impact. At the time of the rate cut, the standalone EPS impact for NWL/HUB was ~9%/21% respectively. However, we expect both platforms to be experiencing higher levels of client cash (NWL reported cash at 11.3% of FUA as at Mar-20 vs 7% in Dec-19) which if sustained would more than offset the impact. We estimate a sustained increase in cash levels for NWL from 7% to 8.5% would ‘neutralise’ the impact of the lower cash margin achieved (HUB does not disclose cash levels, but a move from ~9% to ~11% would neutralise the impact in FY21).
Macro: steady short-term themes. PE entry a longer-term play
Overall, we see recent themes as consistent, including: 1) a confirmed RBA cash rate stance of 25bps (with some medium-term risk around the margin achieve on pooled client cash with ANZ); 2) the impact of pricing pressure experienced in recent years is still flowing through, but we expect pricing has broadly stabilised over the past 12 months; and 3) we expect solid flows to have continued (with some impact from Covid volatility), with no meaningful impact from the early release of Superannuation scheme. Whilst the competitive threat of bank-owned platforms in new operators’ hands needs to be considered, we do not expect this to disrupt the medium-term momentum for NWL and HUB.
Netwealth – expecting upside to guidance
NWL has provided formal guidance (marginally downgraded on 19-March post RBA rate cut), being: 1) revenue A$116-120m; 2) Underlying EBITDA A$58-62m; and 3) net flows A$8.5bn. All areas of guidance look conservative to us, with higher 3Q cash levels (likely sustained in 4Q) supporting revenue; a greater than expected market rebound in 4Q (vs when guidance was set); and implied net flows in 4Q20 of ~A$1bn (vs A$3.2bn in 3Q20 and heading into the seasonally strongest quarter). We expect 4Q20 net inflows around ~A$2.2bn (noting the ANZ transition is a swing factor); and our FY20 EBITDA forecast of A$64.8m sits ~5% above the top-end of guidance. We view NWL as a high-quality business and whilst we expect consensus upgrades, we view the stock as fully valued.
HUB24 – expecting solid 4Q20 FUA outcome
We expect HUB to report FUA growth of ~15% (to A$17.4bn) for the quarter, with the uplift driven by roughly equal contribution from investment market performance and flows. We expect flows of ~A$1.05bn, which is up ~7% on pcp, but down from ~A$1.2-1.3bn in recent quarters. Whilst the impact from a lower margin achieved on cash (post the RBA rate cut in March) is material, we expect HUB will be benefitting from heightened trading activity in 4Q20 and likely higher average cash balances. We retain an Add recommendation on HUB, with continued flows driving growth in the short term (FY21) and scale benefits (operational leverage) materialising more meaningfully from FY22.
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