Last month I wrote an article about a stock that is a quality compounder, PWR Holdings (ASX:PWH). (Read here). Another Australasian stock that meets the criteria for a quality compounder is Netwealth (ASX:NWL). The concept is based on an article written by Stockopedia contributor Roland Head, where he built a screen to find quality stocks that are strong compounders. (Building a screen to find Compounding Quality stocks) I took this screen and applied it in the Australasian context. 14 stocks currently meet all of the criteria.
Netwealth is one of the fastest growing financial services companies in Australia. Founded in 1999, in 2023 they are forecast to have generated $214 million in revenue. Revenue has been growing at a compound annual growth of 23% over the last five years and ten years ago was only $43 million.
Netwealth provides a digital platform that supports how financial products are delivered to the market. They service both financial advisors and personal investors. They provide clients with access to financial products including superannuation, investor directed portfolio services, managed accounts, managed funds, SMSF administration and aggregated reporting services.
Growth in Funds under Administration (FUA) and Funds under Management (FUM) are the principal drivers of revenue growth. This is determined by inflows from new and existing clients as well as the performance of investment markets. The graph below shows the growth in funds as well as accounts over the last three years.
Source: Netwealth, March 2023 quarterly business update and outlook, 3/4/2023
Revenue growth has included picking up customers at the expense of the banks, AMP and Insignia. The chart below shows that Netwealth was the fastest growing platform in the year to September 2022. Despite this growth, they still only have 6.3% market share, suggesting that there remains a strong runway for growth.
Source: Netwealth, March 2023 quarterly business update and outlook, 3/4/2023
The financial advice/funds management industries have come under a lot of fee pressure in recent years. As Netwealth is a part of that ecosystem, and their fees form a component of the overall fee charged to investors by advisers/fund managers, their margins will continue to come under pressure. EBITDA margin for the first half of FY23 declined from 50.7% in the prior…
