Netwealth Group: Cash clarity

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
20 January 2022, 12:30 PM
Sectors Covered:
Diversified Financials, Professional Services

  • Netwealth Group (ASX:NWL) reported 2Q22 FUA of A$56.7bn (+9% qoq; +46% on pcp), with net inflows the primary driver (A$4.7bn quarterly FUA uplift).
  • 2Q net inflows were A$3.6bn, -11% for the quarter and +41% on the pcp. NWL upgraded FUA net inflow guidance to A$13.5bn (from A$12.5bn).
  • NWL provided details of the new pooled cash arrangements. Whilst the outcome is a slightly lower ‘take rate’ vs expectations, NWL remains leveraged to cash rate rises and we view the certainty as a positive.
  • We retain a Hold recommendation on valuation grounds only. We view NWL as an attractive business, benefiting from a strong industry position and tailwinds. Revisiting the proposed bid for PPS presents upside risk to our neutral position.

2Q22 FUA update

NWL ended 2Q22 with FUA of A$56.7bn, up 9% for the quarter (including positive market movement of A$1.1bn) and up 46% on the pcp. Fee paying FUA was 63.5% (down from 64.2% in 1Q22), driven primarily by increases in equity markets.

Q22 net inflows were A$3.6bn, down -11% for the quarter (which included two large insto flows) and up +41% on the pcp. NWL expressed high confidence in the pipeline and upgraded FY22 net inflow guidance to A$13.5bn (from A$12.5bn).

2Q22 member accounts of 107,103 (+21.4% on pcp) reflects ongoing growth within the adviser clients using the platform. Pooled cash balances ended the period at 6.1% of FUA (6.7% in 1Q22), equating to A$3.46bn (A$3.48bn in 1Q22).

NWL also re-flagged the step up in investment made (people and IT) in 1H22, implying materially higher expenses in 1H22.

Flow momentum continues; clarity on pooled cash arrangement

Net inflows beat guidance: Flows momentum continued in 2Q22 (A$7.6bn 1H22 total tracking well against upgraded FY22 A$13.5bn guidance). We forecast net inflows of A$14bn for FY22.

Outcome on pooled cash margin: NWL announced its new pooled cash arrangements, remaining with ANZ and achieving a ~50bps margin over RBA Cash rate (a ~45bps lower ‘take rate’ vs Morgans previously assumed ~40bps cut).

Overall, we view the certainty as positive and NWL retains a relatively ‘vanilla’ cash account structure with upside to an increased RBA cash rate. NWL stated it will benefit from rate rises under the revised agreement, noting that a 50bps RBA cash rate will see NWL exceed the current 105bps margin (at which point any further cash rate increases will be passed through to account holders). 

Forecast and valuation update

We downgrade FY22 EPS by 3.5%, factoring in higher investment spend than previously assumed. Our FY23/24 forecasts are increased 2%/4.8% from higher flows/FUA and factoring in improved margin on pooled cash in FY24.

We note an RBA cash rate at 50bps would result in a ~13% FY23 EPS upgrade.

Our DCF valuation moves to (login to view).

Investment view

We view NWL as an attractive business, benefitting from a strong industry position, high cash generation and industry tailwinds. The clarity on pooled cash earnings is a positive, with leverage to increasing rates.

Valuation remains our only hurdle and we retain a Hold recommendation.

We note NWL has previously indicated a takeover offer for PPS which we think would be accretive and presents upside risk. .

Price catalyst 

NWL will report its 1H22 result on 16 February 2022.

Catalysts include acquisitions and large client wins (transitions).


Aggressive/irrational competitor pricing; lower-than-expected inflows; loss of a major client relationship; greater-than-expected revenue margin pressure; and slower medium-term net inflow profile versus market expectations. 

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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