Netwealth launches pricey IPO

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Fast-growing investment industry service provider Netwealth has launched a prospectus offering 71.3 million shares at $3.70 a share, seeking $264 million of equity capital. New shareholders will own 30 per cent of the equity in the company.

The offer opens on November 2 and the company expects the shares to commence trading on the Australian Securities Exchange on November 28.

The shares are not cheap. At the offer price, the share will list on a price earnings ratio of 32.2 times forecast 2017/18 earnings – about twice the market average.

Netwealth is offering investors an opportunity to participate in the growth of the specialist platform provider market. Platforms, which are also described as wraps and mastertrusts, are administration services for financial intermediaries, SMSF trustees and private investors, which consolidate investment holdings for transaction, reporting and tax purposes.

The platform market is dominated by the major banks and large diversified financial institutions. The market leaders include Westpac (BT Financial), AMP, Commonwealth Bank (Colonial), National Australia Bank (MLC), ANZ, IOOF and Mercer.

Companies like Netwealth aim to take market share from the incumbents by being more innovative.

“We are well placed to generate profitable growth from the structural shift within the platform market from banks to specialist platform providers. According to market researcher Investment Trends, 19 per cent of financial intermediaries are considering switching platforms in the next 12 months,” the prospectus says.

Netwealth was founded in 1999. It reached $1 billion of funds under management and administration in 2007 and currently has more than $15 billion, with 2100 financial intermediaries using its platform.

The company’s earnings grew at a compound annual growth rate of 30 per cent over the three years to 2016/17. In the year to June it reported revenue of $60.6 million and net profit of $16.8 million.

It is forecasting revenue of $80.2 million and net profit of $27.3 million for the current year.

The board says it will target a dividend payout ratio of between 60 per cent and 80 per cent.

The company says the business is “highly cash generative”, with strong cash conversion from EBITDA to operating cash flow. It currently funds its operations, product development and other internal growth initiatives through operational cash flow.

Netwealth’s market share in the platform market at June 30 was 1.7 per cent. However, its share of net funds flow over the 12 months to June 30 was 18.6 per cent.

Specialist platform providers have increased their share of net funds flows, compared with institutional platform providers. Netwealth, HUB24, Praemium and OneVue had a combined 32 per cent share of net funds flow in 2016/17.

According to the prospectus, the growth in the specialists’ share is happening because many financial intermediaries are looking to enhance their businesses using technology but may not have the capital to invest. They are outsourcing to platforms as an alternative and they are choosing the providers who are making innovative developments.

Some of these technologies include managed accounts (a different ownership structure for investments), robo advice and data analytics.

Another growth area is the provision of services to the non-superannuation investment market. Traditionally, most non-superannuation investments have been held by investors themselves rather than through platforms. Less than 5 per cent of personal investments are currently held through platforms.

However, consultant Rice Warner expects the use of platforms for personal investments to increase to 8 per cent of the total invested by 2030.

Netwealth also has a managed funds business. It is the issuer and responsible entity of 12 funds, the Global Specialist Series, which have $884 million of funds under management.

While Netwealth has achieved impressive growth, there are a couple of reasons investor might baulk at paying a high PE premium for the stock. Recent figures from industry analyst Strategic Insight show that net funds flows into platforms do not always rise, despite mandated superannuation contributions. Over the past 10 years there have been five years when the year-on-year growth in inflows has fallen.

Another concern is that Netwealth’s platform revenue as a proportion of funds under administration has been falling. It was 68 basis points in 2014/15, 66 bps the following year and 60.9 bps in the year to June. The company is forecasting that it will fall to 57.3 bps in the current year.

However, the EBITDA margin has increased from 36.6 per cent to 49 per cent over the same period.

The company, which was incorporated on June 30, does not currently own the platform business, which is operated by Netwealth Holdings Ltd. It will be acquired by the company in connection with the offer. The group will be restructured to superimpose the company as the holding company of NHL. Existing shareholders have entered into a share sale agreement to implement the restructure.

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