Morningstar sceptical on Platinum/L1 merger | Australian Markets

Research and scores home Morningstar has delivered a extremely pragmatic evaluation of the proposed merger of Platinum Asset Management and L1 Capital, suggesting it’s no panacea for the issues besetting Platinum.

Morningstar equity analyst, Shaun Ler mentioned that whereas the merger would create a bigger entity with better 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 mentioned that, on that foundation, Morningstar was retaining its truthful worth estimate of $0.50 per share for Platinum with out 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 evaluation mentioned.

“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 related, with each working as lively Australian managers offering worldwide equity methods. However, they differ subtly in strategy and product combine. We don’t count on significant upside from cross-selling alternatives. While L1 has a more diversified consumer base, we’re skeptical that Platinum’s merchandise—given their poor relative efficiency—would appeal to L1’s purchasers. On the opposite hand, Platinum’s consumer base is concentrated amongst retail and suggested traders, a extremely aggressive section already nicely served by a big range of investment choices.

“On a more constructive notice, L1’s stronger efficiency document ought to underpin earnings growth and bolster the mixed entity’s financial place. L1 seems to offer a broader product vary, together with hedge funds (making use of long/short methods), 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.”