Platinum Asset: Interim result 2014

A 40% rise in funds under management and performance fees of $24m have driven a 51% increase in half-year revenues at Platinum Asset Management, to $162m, and a 68% rise in net profit to $105m. Without the performance fees, revenues would have risen 36% and net profit 44%.

A fully franked dividend of 14 cents per share was declared (ex date 25 Feb), up from 8 cents in the prior period. Earnings per share were up 63% at 18.1 cents, the 5% gap between it and net profit growth being due to a 3% rise in shares on issue following the exercise of staff options. After accounting for dilution from options that are expected to be exercised in future, the share count rises by another 1% and earnings per share are ‘only’ up 61% at 17.9 cents.

This just goes to show that the company’s impressive cost control doesn’t tell the whole story – those fund managers need to get their rewards somehow. In fact, in the latest half, staff costs rose 15% – out of a total cost increase of 11% – so it looks like a few bonuses got paid as well.

So while shareholders did very well in the half, Platinum’s staff won’t be complaining. That’s as it should be in a people business like this – you just won’t get the best fund managers if you don’t give them their share of the rewards.

Excellent performance

The short-term performance of Platinum’s funds has certainly got its zing back. While short-term performance tells you little about a fund manager’s ability, it does matter because it influences fund flows, whether or not it should. So it’s good to see most of Platinum’s funds outperforming in the year to 31 January, including a 5% outperformance by the International Fund, which returned 39.5%. Of course it’s the longer-term performance that should influence fund flows and that remains exemplary, with all Platinum’s funds ahead over five- and ten-year periods.

Despite these efforts, however, funds under management suffered a small outflow in the first half, with a net $93m walking out the door. That follows outflows of $78m and $110m in the first and second halves of 2013. At the moment this is being swamped by investment returns, but it remains a concern that performance isn’t translating into fund inflows.

Contrast this, for example, with Perpetual, which has had inflows for the past two quarters, and fellow international Magellan Financial Group, which has tripled funds under management in the past year. No doubt some of this has been at Platinum’s expense.

Take Kerr of key man risk

Even so, we continue to back Platinum’s investment performance and, ultimately, its ability to attract funds under management. The only niggle with this is that Kerr Neilson is getting into his mid-sixties and his retirement date must be getting closer. He still seems to enjoy it, but no doubt he enjoys other things as well and it’s not as if he needs the money. The broad-based performance of Platinum’s funds suggests that he’s been able to build a culture at Platinum that goes beyond his own abilities, but there is a risk to that.

Where exactly earnings per share end up for the full year will depend on performance fees and average funds under management in the second half. But excluding performance fees, earnings per share would have been about 15 cents in the first half (albeit flattered by a low tax rate of 25%), and FUM has increased, so the consensus EPS forecast of 30 cents looks undercooked.

It’s probably fair to go with that figure on an underlying basis, though, which puts the stock on a PER of about 25. That looks reasonable for a fund manager that seems to be beginning to get the wind behind it and we’re increasing our Sell price to $8 (and our Buy price to $5.50).

However, we urge you to keep in mind the risk of Kerr Neilson leaving and to pay attention to our recommended portfolio limit of 5%. The stock is up 12% since Platinum price guides raised on 14 Jan 14 (Hold – $5.56) and has more than doubled since our last positive recommendation on the stock on 10 Jan 12 (Long Term Buy – $3.57). If, following this strong run, your holding has got beyond 5%, then it would make sense to consider taking some profit. HOLD.

Note: Our model Growth and Income portfolios own shares in Platinum Asset Management.