Netwealth share price nosedives despite record income

Despite a 46 per cent increase of the wealth-management business’s funds under administration (FUA) compared to last year, currently $56.7 billion, and a 17.1 per cent rise in income to $84.7 million over the same period, investors were clearly spooked by the results.

Potentially alarming investors, operating income was $43.2 million, up from $31.9 million during 1H21 and employee benefits jumped from $23.4 million to $31 million over the same period. Operating income represents slightly more than 52 per cent of platform revenue, while employee benefits are more than 37 per cent.

“Netwealth expects to benefit from growth in its affluent, high net-worth and private wealth groups as its platform functionality supports and enables the unique and differentiated needs of the segment,” Netwealth’s accompanying press release stated.

“As part of our ongoing commitment to these market segments, Netwealth will be launching a major upgrade to the Netwealth wealth accelerator service and adding a new non-custodial administration and reporting solution during Q4 2022.

“In FY2022, we have strategically stepped up our investment in our technology and operations teams to ensure that we continue to innovate and maintain our scalability and service levels as we grow rapidly. This investment will enable us to maximise the opportunity and our success in growing our clients, market share and profitability.”

In positive news for the business, clients using the platform grew by 18,914, and the underlying profit was $27.5 million for the half-year – a drop of just 0.5 per cent.

The average account size increased to $529,000, which the business notes diversify revenue streams and increase ancillary revenues.

Negative trends include the balance of Netwealth’s cash transaction account reducing during 1H22 to 6.1 per cent of FUA as of 31 December.

Providing a platform for financial intermediaries and clients to invest and manage funds, Netwealth has warned its cash revenues will reduce further in the second half as it will hold less cash and receive lower margins from March, on account of a previous agreement with ANZ. Deposits are set to drop from 95 per basis point (BPS) to 50 as part of the arrangement.

As well as operating as a superannuation fund trustee, the business provides administrative support, risk, governance and custodial service and is using earnings to invest heavily in technology, people and infrastructure, with 40 per cent of the staff headcount involved in IT services, which was topped up with 24 staff in the past six months.

Netwealth’s investment in technology aims at enhancing 3rd party data feeds into its platform, which it believes will help advisers and investors obtain a clearer picture of investors’ total wealth. In addition to 170 banks and credit unions already available, clients can access data from other superannuation funds, broking and share trading accounts.

The business remains the largest specialist platform provider and 6th largest platform claiming 5.2 per cent of the market, an increase of 1.1 per cent and is expecting to see continued growth to its platform over the coming year as the industry further consolidates.

The results follow Netwealth’s unsuccessful takeover attempt of Praemium (ASX: PPL) in November 2021, which caused a drop in the share price of the business.

If the Reserve Bank of Australia (RBA) returns to 50bps in March 2022, Netwealth expects to see immediate benefits as its margins would increase.

Shares in Netwealth (ASX: NWL) dropped 9.76 per cent for the day on the back of the published half-yearly results.