Jan 25, 2023

Homeowners may be fuming about rising interest rates that prompted an apology by Phillip Lowe, but for online broker SelfWealth (ASX: SWF), it’s kicked them into positive cashflow thanks to an abundance of customer funds being held on the platform.  For the quarter ended 31 December 2022, SelfWealth reported $151k in positive cash flow  but this is predominantly due to the increase in interest revenue on client cash held of $585m. With an interest rate of 3.1% on the client cash balances, this represents about $4.5m worth of  interest income for SelfWealth which was not passed back to their customers. The interest forms a critical segment of the platform’s non-trading revenue. Revenue on trading activity came in at $1.9m for the quarter, declining 42% from $3.2m for the previous December quarter. Trading activity peaked in the March quarter of 2021 and totalled $3.9m, showing how far turnover has fallen from peak retail mania during the Covid period. Receipts from customers for the past four quarters showed $26m of inflow, and over the same four quarters a total of $30m in cash was spent.  Total funds under management (FUM) increased 4% to $8.9 billion, comprising $8.1 billion securities held on HIN, and $583m in cash balances, leaving around $210m in overseas assets. SelfWealth had been hopeful that the introduction of cryptocurrency products would give their trading revenue a boost. But 12 months after announcing the ambitious plans, the broker confirmed they will no longer continue pursuing the project and halted its launch given market instability and lack of regulatory clarity - but depending on the future of the industry, there is a chance the project will be revisited.   With the majority of SelfWealth’s total cash flow coming from interest income, the challenge will be to deliver on growth opportunities to prop up its bottom line.  Seeking to improve their margins, Selfwealth confirmed FNZ as the new provider of equities clearing and settlements in Australia, replacing OpenMarkets Group (OMG) . As the transition gets underway while the current contract with OMG expires in late 2023, there are expectations that there will be a modest net financial benefit to SelfWealth.  The switch away from Openmarkets to FNZ may influence OMG’s recent announcement of advancing the US market with its listing on the NASDAQ via a SPAC at a valuation of US$90m to US$110m. Over the past few years, SPACs have been a relatively new phenomenon, with cash-strapped private companies turning to Special Purpose Acquisition Companies (SPACs) as an alternative route to going public. This shortcut to becoming publicly listed avoids the usual regulatory hurdles and associated costs that come with a traditional IPO method-to-market. Described as ‘blank check’ companies, where investors sink money into a SPAC, they rely on these investments to provide strong returns for getting in early, with their decision driven by being able to create speculative interest. However, they come with inherent risks due to a lack of tangible operations or financial outlook, lack of prospectus and no regulatory oversight. It was only in June 2021 when OMG looked to float at a $160m valuation before online broker Superhero severed its clearing contract with the Group, and indirectly scuppered the planned ASX-listing. By early 2022, there were staff redundancies and the previous white-knight and CEO of the Company, Ivan Tchourilov resigned, prompting Dan Jowlett from Shaw and Partners to step in and restructure the business.  By August 2022, OMG was restructured with the operating assets (e.g. Openmarkets Australia Ltd - the ASX participant) being sold off to a private equity vehicle. This left the previous holding company, Openmarkets Group Ltd and its shareholders with minimal tangible assets. The Australian Financial Review points out that OMG will issue a proxy statement and SEC approvals in February. This may show the impact and loss that SelfWealth had on the business.