Neilson's capital plans

Platinum Capital, the international equities investor managed by Kerr Neilson's Platinum Asset Management, is tapping investors for up to $136 million in a rights issue timed to take advantage of attractive opportunities in the market.

The one-for-one rights issue is being pitched at $1.07 a share, a 10 per cent discount to its previous close, and below its estimated net asset value of $1.33 as at September 30.

Platinum Capital has had a rough ride through international markets in recent years, culminating in a poor reception from unhappy investors at the annual general meeting last year.

However, Neilson says its strategy has delivered superior returns in the past 12 months, gaining 6.1 per cent in the September quarter versus the MSCI return of 1.5 per cent, and down 10.5 per cent over the previous 12 months, compared to an 18 per cent fall in the MSCI.

The company says stock markets face "great uncertainty”, but it is finding "a growing number of companies that are unusually attractively priced in the context of anything other than an extreme economic downturn.”

In its quarterly report released today, Neilson says Platinum Capital has invested 0.5 per cent of its portfolio in China Mengnui Dairy, which was at the centre of the recent contamination of milk products in China and elsewhere, forcing its share price to collapse from the mid-$HK20 to $HK7.

Neilson reasons that the contamination was perpetrated by milk aggregators, not the packers, and the government wishes to protect this important rural industry and continues to promote milk as a dietary supplement in schools, and will soon resume its historic growth rate.

Neilson also likes Japan, and cites motor components manufacturer Denso as an example. It has boasted a 2.5-fold increase in annual sales over the last decade to $US40 billion, a 3.5 fold increase in profits and a doubling in book value, but now boasts a smaller market capitalisation than in 1988.

Neilson says its share price is depressed partly because Japan is unfashionable and partly because the motor industry is going through a down phase. "The experience gained from the credit bubble of Japan in the late 1980s may be more instructive than some would admit. What is encouraging is that the Nikkei had a very strong 30 per cent rally once the problem was generally understood. We would expect the same thing now, possibly after acceptance that the growth of the Chinese economy must slow down eventually to more normal levels.”

Neilson says his team can identify broad swathes of value across the globe, although not in the recent hot spots of resources and energy and not, for the most part, in defensive industries.

"The best prospects of good returns are in sectors currently neglected because of their dull near term prospects,” he says. "Will we make you money in the next few quarters? We cannot know. We are now in the earnings down-cycle and valuations in some cases are unusually attractive, providing opportunities that will be seen in retrospect as once-off opportunities. We must accept, however, that in the short-term the outlook for profits is poor.”

The rights issue is being assisted by Commonwealth Securities. Platinum Asset Management received $617,000 in management fees in the September quarter and $2.88 million in the 12 months to June 30.