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One of the fastest-growing areas of the growing financial services market is the “platform” market, where technology-based platforms allow financial advisers, accountants and clients to hold, transact in and administer a wide range of investments, across different asset classes and legal structures, for the benefit of Australian investors.
The platforms hold both superannuation and non-superannuation investments, and offer investors and advisers an efficient and transparent way to handle investment portfolios, with detailed reporting so that both groups can accurately monitor the investors’ financial and tax position, and the performance of their investments. Platforms can handle a wide range of investments, including domestic and international shares, exchange-traded funds (ETFs), managed funds (often at cheaper wholesale rates), cash and term deposits, insurance products, and managed accounts, investment portfolios where the investor maintains direct ownership of the underlying investments, while having them managed according to a set investment strategy.
The platform market has grown at a compound annual growth rate of 11% since June 2011, with FUA swelling from $436 billion to $765 billion at June 2017. The market is dominated by the big financial services names, such as Westpac/BT (owner of the Panorama platform, which has 18.9% market share), AMP (18.1%), CBA/Colonial (15%), NAB/MLC (14.6%), Macquarie (9.7%) and ANZ Wealth (5.1%). The recently floated Netwealth – the largest of the specialist operators – is the tenth-largest player, with 1.7% market share.
But while the specialist operators are small, they are rapidly increasing their share of net funds flow. According to the 2017 Strategic Insight: Master Trusts, Platforms & Wraps report from research firm Plan for Life, the specialist operators’ share of net funds flowing into platforms has rocketed from 3.6% just four years ago, to 32.6% of net new funds.
What is driving this is a combination of structural changes in the industry. Where banks in the past wanted to have ‘vertically integrated’ business models across the wealth industry – banking, funds management, insurance and advice – because scale was the attraction, a much more disrupted and regulator-scrutinised industry today makes that model far less alluring.
As the industry has digested the Future of Financial Advice (FOFA) reforms of 2013, the introduction of a ‘best interests’ duty for financial advisers and a ban on conflicted remuneration have driven radical change in the vertically integrated model. The reforms have targeted the bias to in-house product that is inherent in this model. Increasingly, institutions are opening up their approved product lists (APLs) to provide clients with more choice, and banks have realised the conflict in being product manufacturers – and are moving back to being distributors.
On the advice side, there has been a scramble by financial intermediaries – disillusioned by the big bank networks following scandals and increased governance processes – to operate in a business structure that is not aligned with or owned by a major bank or large diversified financial institution. Independent advisers and stockbrokers are growing in numbers, and they are the natural customer for independent platforms. According to the ASIC Financial Advisers Dataset (July 2017), 63% of Australian financial intermediaries are now licensed by entities outside the big four banks, AMP and IOOF: at December 2015, this proportion was 57%.
Independent platforms are also growing as managed accounts (MAs) find increasing take-up across dealer groups and advisers. MAs allow advisers to step up from being just intermediaries to strategic advisers involved in picking stocks and building portfolios for their clients: advisers like the professional opportunity and the better fee prospects this brings. While MAs held about $14 billion in 2015 and represented less than 2% of the platform market, Morgan Stanley forecasts that by 2020, MAs will hold $60 billion and account for about 7% of the total platform market.
The independent platform space has a number of listed players poised to capture these trends.
Platform operator HUB 24 has been around a long time – it began operations in 2007, just in time to get smashed by the GFC – and given that history, it is not surprising that HUB 24 only broke through to maiden profit in the recently completed FY17. (It did generate positive operating cash flow in FY16, but did not report a profit.) However, FY17 was the breakthrough year, with revenue surging by 45% to $61.9 million, giving a net profit of $3.9 million, up from a $1.5 million loss the year before.
Funds under administration (FUA) on the platform jumped by two-thirds in FY17, to $5.5 billion: in a market update on 20 November, HUB 24 announced that this figure had reached $6.6 billion. The company is targeting $12 billion of FUA within the next three years. While HUB accounts for just 0.6% of platform funds under advice, its current share of net inflows to platforms is much more impressive, at 10.4%.
HUB 24 has a strong balance sheet with a healthy cash balance and no bank debt as at 30 June 2017. In January HUB acquired Agility Applications, which provides tools to stockbrokers that are also undergoing structural change as they transform from research and broking, into financial advice.
Investors have had to be patient: in particular, those who saw the dark days of a share price of 35 cents, back in 2013. HUB has been a tremendous performer since then, racking up a total gain of 86.6% a year over the past five years, but this year’s rise, from $5.20 to $9.96, has pushed the stock past fair value. Analysts expect dividends to start in the current financial year, but the expected yield is minimal. HUB 24 is a stock with a great future, but it looks at present that too much of that potential is already baked-in to the share price: HUB is trading on 52 times expected FY18 earnings, a multiple that requires huge faith to buy.
The recently floated Netwealth showed last month just how keen investors are on the platform space: issued at $3.70 a share. NWL hit the ASX screens at $4.88 and surged to $5.11 within 30 minutes, a gain of 38%, pushing its market capitalisation to more than $1 billion. The stock has since moved to $5.33.
Netwealth tells a similar tale to HUB 24. It has just 1.7% of industry FUA, but in the year to June its market share of the $20.8 billion in net fund flows was 18.6%. At September 30 2017, the company’s funds under management and advice (FUMA) FUA had reached $15.7 billion, up from $14.3 billion at 30 June. More than 2,100 advisers use the platform.
Float co-manager UBS forecasts that Netwealth will boost its earnings before interest, tax, depreciation and amortisation (EBITDA) by 60% in the current financial year (FY18) to $39.9 million, with net profit lifting by 62%, to $27.3 million. “Growth is expected to be propelled by strong net flows driving funds under advice up 41% and EBITDA margins from 41% to 49%,” UBS said.
We know that Netwealth expects to pay dividends: the prospectus states that Netwealth intends to target a dividend payout ratio between 60%–80% of net profit, starting in October 2018, for the period between completion of the pre-listing restructure of NWL, which took effect on 24 November 2017, and 30 June 2018. The dividend is expected to be fully franked. The implied FY18 yield given in the prospectus, based on the $3.70 issue price, was 2.2%: that implied a dividend of 8.14 cents a share, which, given that the share price has moved to $5.33, now implies a fully franked dividend yield of 1.5%.
Netwealth is a great business, with excellent growth prospects, but is something of a victim of the float success: the stock has gained 44% from its issue price, and investors now have to wait to see whether NWL meets earnings expectations, before analysts get a better handle on the share price prospects. The prospectus gave (at $3.70) a forecast FY18 price/earnings (P/E) ratio of 32.2 times earnings: this implies expected earnings per share of 11.5 cents, which, at $5.33, gives a forward P/E of 46.4 times earnings. That’s not quite as expensive as HUB24 – but it is a relatively demanding P/E that needs to be filled out by the actual earnings.
Junior platform provider OneVue operates the OneVue investment platform, which administers a wide range of assets, including unit trusts and managed accounts. OneVue is a both a direct and intermediated (used by financial planners and accountants) platform, which enables investors to transact, manage and report on their investments on a consolidated basis. The platform administers a wide range of assets, including managed accounts, unit trusts, term deposits, ASX-listed securities, as well as property and debt. It also provides a retail superannuation fund, as well as specialist SMSF compliance and administration services.
OneVue also has a fund services business that provides outsourced unit registry services and installed software to a range of investment managers, trustees, and custodians. Earlier this year this division introduced a new fund marketplace, called the FUND.eXchange, which is accessed via the OneVue platform.
The third business, superannuation trustee services, was added in 2016 when OneVue merged with Diversa, Australia’s leading independent retail superannuation trustee.
In FY17 OneVue’s revenue surged by 53% to $40.9 million, while net profit came in at $209,000, after a $4 million loss in FY16. Analysts expect OVH to boost earnings per share (EPS) by 150% in FY18, to 1.9 cents, and then boost that by almost 90% in FY19, to 3.6 cents – with dividends starting to flow in FY19. That implies a plummeting P/E, from 88 times historical FY16 earnings, to 35 times expected (analysts’ consensus) FY18 earnings, to a far more realistic 18.6 times expected 18.6 times FY19 earnings. And analysts see far clearer scope for capital growth for OneVue than with HUB 24 or Netwealth – although it is a smaller player in terms of market share and share of funds flow.
Praemium operates the V-Wrap platform and a discrete separately managed accounts (SMAs) platform, a retail superannuation offering called SuperSMA. It also provides customer relationship management (CRM) and financial planning software, known as WealthCraft, and has a growing individually managed account (IMA) service in the United Kingdom.
In FY17, Praemium reported net profit of $2.2 million, up 42%, on a 17% rise revenue to $35.4 million. over financial year 2017, with closing cash reserves of just under $9 million. The company saw record asset inflows of $1.9 billion, up 24% on the prior year, and took another big step forward in the UK, entering the pension market by acquiring a SIPP (self-invested personal pension) business and launching a Praemium SIPP on its international platform.
For the September 2017 quarter, Praemium saw record quarterly inflows of $749 million, record Australian inflows of $578 million and funds under administration (FUA) of $6.6 billion. Last month the company announced that it total FUA had moved past $7 billion, with $4.53 billion in Australia and $2.49 billion across its overseas operations.
PPS has had a strong year, rising from 39.5 cents to 59 cents, but on Thomson Reuters’ collation, analysts’ consensus still sees room to move higher, with a consensus target price of 65 cents. (FN Arena is not so confident, but it only assesses one analyst, from Morgans.) While a hefty increase (157%) is predicted in EPS in FY18, to 1.8 cents, dividends are not expected to flow until FY19, when a 0.9-cent unfranked dividend is projected, from EPS of 2.6 cents. On those FY19 numbers Praemium is priced at a 1.5% dividend yield and 22.7 times earnings, which are numbers that could easily support a buying case – particularly on the overseas expansion angle, which the other platform players don’t have.