Morningstar sceptical on Platinum/L1 merger benefits

Research and ratings house Morningstar has delivered a highly pragmatic assessment of the proposed merger of Platinum Asset Management and L1 Capital, suggesting it is no panacea for the problems besetting Platinum.

Morningstar equity analyst, Shaun Ler said that while the merger would create a larger entity with greater scale, “it does not reverse the structural challenges facing active managers like Platinum and L1 – namely, free pressure and market share loss to passive strategies such as ETFs”.

“The proposed merger could unlock some value, mainly through the elimination of duplicate costs. There may also be cross-selling benefits from a larger combined distribution network, although this is difficult to quantify given potential product overlaps and Platinum’s underperformance,” he wrote.

Ler said that, on that basis, Morningstar was retaining its fair value estimate of $0.50 per share for Platinum without having factored L1 into its projections.

“If the merger proceeds, Platinum’s shares on issue would increase to around 2.3 billion from 582 million, assuming it issues shares such that L1 shareholders own 75% of the group as per current terms. At a price of $0.57 per share, this implies a combined value of about $1.3 billion,” his analysis said.

“This implies a market capitalization to funds under management ratio of close to 13% for L1, well above the typical range of 2%-4% for listed asset managers such as Pinnacle or Regal. This is despite L1 managing less money than Platinum, though we note differences in earnings drivers may justify some of the premium.”

“L1 Capital and Platinum are broadly similar, with both operating as active Australian managers offering international equity strategies. However, they differ subtly in strategy and product mix. We do not expect meaningful upside from cross-selling opportunities. While L1 has a more diversified client base, we are skeptical that Platinum’s products—given their poor relative performance—would appeal to L1’s clients. On the other hand, Platinum’s client base is concentrated among retail and advised investors, a highly competitive segment already well served by a wide array of investment options.

“On a more positive note, L1’s stronger performance record should underpin earnings growth and bolster the combined entity’s financial position. L1 appears to offer a broader product range, including hedge funds (applying long/short strategies), activist funds, and real estate investments.

“Platinum’s offering is more narrowly focused on international equities, although it also employs long/short strategies and maintains an absolute-return focus like a hedge fund. According to data from Morningstar Direct, several of L1’s retail and wholesale share classes—representing around 40% of its total FUM—have achieved strong growth of between 20% and 70% per year over the past three years. This level of growth would be highly unlikely for a poorly performing manager and stands in contrast to Platinum’s persistent FUM contraction over the same period due to weak investment performance.”