Morningstar adds weight to Platinum/L1 merger

Research and ratings house Morningstar has joined the chorus of voices encouraging Platinum Asset Management to move further with respect to a merger with L1 Capital.

Amid reports of investor impatience, Morningstar senior analyst Shaun Ler has weighed in noting that the ratings house has raised its fair value estimate for a combined Platinum-L1 entity to 70 cents per share, up from 50 cents.

His analysis said the merger would likely proceed in circumstances where Platnium co-founder and major shareholder, Kerr Neilson, does not appear to oppose the merger, having sold a large portion of his stake to L1 while granting them a call option over part of his remaining shareholding.

“We agree that the merger is sensible,” Ler said. “As a stand-alone firm, Platinum faces organic decline with persistent net outflows across multiple years and little prospect of a turnaround, given poor relative performance, high fees and investment team changes creating stability concerns.”

He said the merger improves the outlook for Platinum helping arrest its earnings decline by merging with another asset manager with better-performing products in inflow, while allowing duplicate costs to be cut.

Notwithstanding raising the fair value estimate, Ler said Morningstar believed the combined group still lacks an economic moat, given the lack of meaningful switching costs arising from diversity in products, client cohort, and distribution reach.

Ler said Morningstar’s L1 fair value is based on limited disclosure from the July 8 merger presentation and that the firm might adjust its estimates as new information becomes available, notably the independent expert’s report due shortly.

“We believe Platinum’s merger with L1 should be value accretive. The investment styles and firm cultures are broadly aligned. Product overlap is marginal. The combined entity will have greater asset class and client diversity, facilitating cross-selling and customer retention.

“This should help stabilize FUM and improve earnings, such as from cross-selling L1’s products to Platinum clients. We do not expect improved flows into Platinum’s suite of funds given their poor performance.

“Cost reductions will likely involve consolidating technologies and

processes, further removal of mainly non-investment staff, and additional adjustments to remuneration for the investment team,” the Morningstar analysis said.