Selfwealth - A compelling, differentiated proposition in the online broker market

SelfWealth is Australia’s only flat rate stockbroker. Since listing on the ASX in November 2017, the company has enjoyed impressive growth. I caught up with Founder and CEO, Andrew Ward after the release of the company’s March quarter cash flow report which showed 162% year on year growth in cash receipts.

COMPANY DATA

Date of Report	ASX	Price	Price Target	Analyst Recommendation
08/05/19	SWF	$0.13	N/A	N/A

Date of Report 20/02/19	ASX ST1
Price $0.058	Price Target N/A
Analyst Recommendation N/A

Sector: Financial Services	52-Week Range: $0.056 - 0.163
Industry: Capital Markets	Market Cap: $20.34 million

Source: Commsec

What do you do?

SelfWealth was established in 2012 with a view to becoming Australia’s first investment solution driven by the crowd and has transformed into Australia’s fastest growing — and still only — flat rate online stockbroker. The five years prior to listing were spent building systems, the technology platform and support infrastructure. The trading platform was launched in September 2016 with a flat rate of $9.50 per trade regardless of size.

The idea behind the business was to provide investors with insights into the portfolio structures of successful investors so a platform was developed that captured enormous volumes of data from investor portfolios on a non-identified basis around which a range of analytical tools were built. These tools enable investors to benchmark the performance and risk profile of their own portfolio against the market as well as more successful investors and construct similar portfolios to boost their own performance. The tools also provide insights into individual stocks so the investor can see if successful investors, as measured by the returns they achieve, hold, or are buying or selling those stocks. With a broking capability, SelfWealth provides a fully integrated offering.

Through its platform, the company generates income from three sources: client trades on the ASX, interest on the cash holdings held by investors as security backing for trading (in their own accounts) and premium services (the portfolio analysis tools).

What have you achieved?

SelfWealth has taken a measured approach to launching its offering into a highly competitive market. The first phase was to build and stabilise its trading platform and investor tools; second phase was market launch and build trading momentum which has been achieved and the third phase, which will shortly commence will be to expand and fill-out the product offering.

SelfWealth is currently enjoying very rapid growth as it builds marketing momentum and critical mass. The number of active traders increased by 23.4% in the March 2019 quarter and at 11,565 was triple the level of a year earlier. Trade volume of 44,000 in the March quarter was double the volume for the same quarter last year. Coming off a very low base, SelfWealth currently has market share of about 2%.

What are the growth opportunities?

The core business driver remains the growth in the number of active traders and the opportunity is to both increase numbers and market share and to increase revenue per trader through deeper and more effective engagement. This will be achieved through an expansion in the service and product offering and more effective marketing.

SelfWealth’s model is highly competitive, however its ability to build penetration has been constrained by its limited services. This is now been addressed and international trading will shortly be offered with similar pricing structures.

A wholesale adviser platform is also being roll-out which enables wealth advisers to manage client portfolios. This will become an important driver of trading activity.

Finally, the company will shortly launch its own Exchange Traded Fund (ETF) which will provide another growth opportunity. The company will launch an ETF before the end of 2019 which will have a portfolio of stocks constructed from the insights of its now massive database. Stock selection will be based on the construction of the best performing SMSF portfolios in the database which covers some 60,000 de-identified portfolios. All stocks will be equally weighted with fine tuning and rebalancing occurring each quarter.

SelfWealth will earn a recurring annuity management fee based on funds under management. Other ETF’s could be established in due course.

Through to 2018, marketing spend was primarily directed at building brand recognition and as a result per unit cost of client acquisition was relatively high. However, unit costs have markedly fallen as trader numbers have grown and reached critical mass. Now that this has been achieved, marketing spend will be redirected towards to digital media with a greater emphasis on education and how to more effectively use the analytical tools. This aims to achieve a high level of client engagement and increased trading activity.

Financial overview

Sales revenue increased nearly 4-fold in the six months ended 31 December 2018, compared with the same period in the prior year, to drive a 176% increase in overall revenue for the period. But the operating loss rose as costs expanded to manage the rapidly growing scale of the business. Cost growth should moderate as critical mass has been achieved and the loss should now decline as scale continues to build. Cash receipts from trading in the March 2019 quarter were 162% higher than a year earlier pointing to a strengthening in financial performance.

The balance sheet is remarkably simple with cash of $2.5 million as at 31 December 2018 representing 80% of total assets of $3.1 million. Payables of $464K was the principal liability with shareholders equity representing 78% of total assets.

During the March quarter, SelfWealth undertook a small placement which boosted cash reserves to $2.9 million at the end of the quarter.

What do I think?

The broking industry has undergone enormous structural change since online broking first emerged. There are numerous players of which Commsec is the biggest. In what is now a mature market, SelfWealth has successfully built a differentiated model and is rapidly building scale, no mean achievement. Whilst it is unlikely to threaten the big players, the company, could very well build a significant market share making it an attractive add-on to an existing player.

Clearly growth rates will moderate but with multiple growth pathways, revenue should continue to grow rapidly over the next two to three years with a breakthrough to sustainable profitability likely during the next twelve months or so.

We see the key risks being the ongoing rate of growth in client numbers and more particularly the level of inflows into the soon to be launched ETF. Whilst the fund has been underwritten by a substantial seed investment, financial success will be driven by client support.

This is a stock to watch and potential takeover target in a few years.

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Recommendation Rating Guide

Recommendation Rating Guide	Total Return Expectations on a 12-mth view
Speculative Buy	Greater than +30%
Buy	Greater than +10%
Neutral	Greater than 0%
Sell	Less than -10%

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Selfwealth – A compelling, differentiated proposition in the online broker market