The New Criterion: the winners from the banking royal commission

Tim Boreham

Independent Investment Research

If there’s a clear winner from the murky swamp of revelations uncovered by the banking royal commission, it’s the provider of independent administration and investment platforms for the financial advisory industry.

The listed alternatives-- HUB24 (HUB, $13.42), Netwealth (NWL, $8.27) and Praemium (PPS, $1.01) -- could never be mistaken for ‘sexy’ companies.

But when it comes to the recent earnings season, they were among the better performers as advisers migrate in droves from the conflicted bank-owned platforms.

First adopted in the 1980s, platforms were developed as a simple way for investors to hold, acquire and administer assets. For intermediaries such as brokers and financial advisers, they help to streamline advice implementation in an era of elevated regulatory requirements.

Post the royal commission revelations, having a platform owned by the manufacturers of the investment products is as acceptable as dwarf tossing or third world slavery.

The banks (and AMP) still account for about 80 percent of the market. But most of the banks have got the message and are offloading their wealth platforms as fast as they can find a buyer offering a half-decent price.

Given this backdrop, HUB24 reported a 129 percent in underlying net earnings to $5.4 million,  with funds under administration surging 51 percent to $8.3 billion.

Revved-up management also declared a maiden 3.5c a share dividend and increased its guided funds under administration to $19-23bn in 2021, compared with earlier guidance of $12bn by 2020.

HUB24 now accounts for 12 percent of total industry flows and as of March 31 accounted for close to half of new flows.

CEO Andrew Alcock says advisers for some years have been looking for an uncompromised choice of products to offer clients. “The royal commission has just expedited that.”

Lest investors get too excited, the platform industry is also fragmented and very, very competitive.

Another competitive threat is that once bifurcated from their tarnished owners, the bank’s former wealth operations will operate with the ‘independent’ cachet.

But Alcock contends they still will be product manufacturers and in any event will not have invested adequately. “When they’re stand alone they’ll be behind the pack,” he says.

“All up in the last ten years we’ve spent $60m to $70m (on product development) and this year will spend $7m.”

So what can go wrong? The pachyderm in the room is rival BT’s recent decision to slash the pricing of its Panorama platform.

In July BT cut its administration fee to 0.15 per cent of assets, with a $540 a year flat accounting fee. For a holder with an average account of $400,000, this equates to a 42 percent cut

Rivals argue that the reductions are ‘headline’ only, with variations for specific products.  “I think our pricing is very competitive,” says HUB24’s Alcock. “It’s not just about pricing, it’s about features and functionality.”

(Because it provides a tailored service for individual clients, HUB24 doesn’t publish a universal rate card).

Over at Praemium, group revenue grew a healthy 22 per cent to $43.2m, with profit (ebitda) rising 40 per cent to $8.8m.

Praemium operates in Britain as well here and if anything the Old Dart performance bought down the batting average with a negative performance.

As with HUB24, Praemium investors can’t complain about local inflows, up 45 per cent. In particular, self managed accounts inflows rose 69 per cent to $2.2bn.

Shaw and Partners highlights Praemium’s forecast compound annual ebitda growth of 17 percent over the next five years, with double digit earnings per share growth over the next three years.

Not to be outdone, ASX newcomer Netwealth reported a 73 percent surge in full-year profits to $29m, on 36 percent revenue growth to $83m.

Netwealth also reported funds under advice of $18bn, up 41 percent and 18 percent above prospectus forecasts (the company listed in November last year at $3.70 a share).

Netwealth is winning 22 percent share of fund inflows, but still only accounts for 2 percent of the overall market.

“Netwealth has made a large impact in a short amount of time,” opines Pengana Capital’s Steve Black.

“Through updated technologies, elegant user experience and by providing financial planners with the ability to manage their clients’ money, report and charge for additional services, this relatively new platform is positioning itself as a welcome alternative to the tired staples offered by the big banks.”

If there’s a bum note Netwealth’s revenue margins fell 12 percent to 0.53 percent. Profit margins are likely to remain flat as the company re-invests in the business.

HUB24’s margins also came under pressure in the second half and are expected to come under further pressure larger new clients (such as dealer groups) typically demand – and receive -- a discount.

Netwealth is still a family affair as it 53 percent controlled by the Heine family (Michael Heine and son Matt are joint managing directors).

They have no plans to sell down.

As with growth stories, the seemingly unfettered potential of the independent platforms comes at a price: factoring in some generous earnings growth for this year, the shares are trading on ritzy earnings multiples.

Netwealth, HUB24 and Praemium bear market valuations of $1.78bn, $830m and $340m respectively.

But who said quality is cheap?

Given the master trust, wrap and platform market is now worth more than $800bn  and growing at a 12 percent per annum clip, there’s plenty of room to grow barring some radical remediation by those stale incumbents.

Managed Accounts Holdings (MGP) 24c

As its name implies, the smaller Managed Accounts specialises in the sub-sector of managed discretionary accounts administration, which has been driven by the growth of the self-managed superannuation fund sector.

Fresh from its merger with rival Linear Financial Holdings Pty Ltd (Linear) in November 2017, managed accounts posted a headline $2.5m loss but adjusted ebitda for the full year of $2.87m, 95 per cent higher.

The Linear purchase increased Managed Accounts funds under administration from $2bn to $11bn overnight and the figure has since climbed to $13bn. Linear has also bolstered Managed Accounts presence in the stockbroking sector.

Management has guided to ebitda of $7.5-8.5m as the merger benefits percolate to the bottom line.

With a relative puny $73m market valuation Managed Accounts is one to watch as it unveils a wrap product later in the year.

Tim Boreham authors The New Criterion

 Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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