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%.

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.

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.

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.