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Morningstar | A Tale of Two Halves as Performance Bonuses Drive Higher Expenses. Platinum FVE Unchanged

Narrow-moat Platinum Asset Management, or Platinum, has reported in-line fiscal 2018 results, albeit characterised by a weaker second half across flows and profitability after a strong first half. Up 2% to AUD 189 million for the full year, net profit after tax came in slightly above our expectation of AUD 184 million, although second-half NPAT was down 15% on the prior corresponding period. The strong outperformance in the first half attracted staff performance bonuses, which were a key driver behind the weaker second-half NPAT. A fully franked dividend of AUD 0.16 per share was declared, which brings the full-year fully franked dividend to AUD 0.32, up 7% on the year. Our fair value estimate is unchanged at AUD 6.40, which at current prices suggests Platinum remains undervalued.

Fiscal 2018 was a mixed bag for profitability, as investment outperformance attracted high performance fees as well as high performance bonuses, while management fees adjusted downwards for the first full fiscal year since they were introduced. Nevertheless, revenue was up 5.9% during the year to AUD 353.3 million, comprising AUD 328.7 million in management fees, up 5.2%, and AUD 21.9 million in performance fees, up from AUD 1.6 million year on year. Meanwhile, fees for the retail-focused Platinum Trust Funds and Platinum Global Fund, which represent 66% of total funds under management, or FUM, fell 15 basis points to 1.35% effective July 3, 2017. While the year-on-year revenue increase was positive, particularly amid the lower fees, it was heavily skewed towards the first half, as the second half delivered a 2% reduction in fee revenue.

The average management fee for fiscal 2018 was down 17 basis points to 116 basis points across retail and institutional clients, with management adamant that there is no intention to further lower these numbers in the near future. Although we welcome this level of conviction when it comes to pricing, generally this isn’t a decision that is entirely in the company’s control, so we still expect a downward trending average base fee over the long term.

Platinum’s recent outperformance did not come cheap, only highlighting the competitive forces at play for retaining staff. Staff remuneration expense was up 43.8% to AUD 49.2 million during the year, bringing the average remuneration per employee to about AUD 500,000, compared with about AUD 375,000 in fiscal 2017. We appreciate that with good performance comes higher salary expenses, and we’d rather that scenario than underperformance any day.

We have already commented on the disappointing end-of-year FUM, after Platinum reported this information on July 15, 2018, but it’s worth reiterating. Net flows for fiscal 2018 were AUD 1.0 billion positive compared with negative net flows in the prior year of AUD 3.6 billion, whereas investment performance contributed a further AUD 3.5 billion through 2018. Closing FUM at June 2018 was AUD 25.7 billion, up 13% year on year but down 5% since December 2017. This included a AUD 1.5 billion net distribution paid out in June 2018. Platinum attributed the second-half weakness to three key factors: 1) China tightening; 2) rising U.S. benchmark and interest rates; and 3) tariffs and trade wars. It’s difficult to see any of these factors becoming less of an obstacle in the near term, so we remain subdued in our expectations for performance in fiscal 2019. However, should there be a sharp easing in any of these factors, performance and flows will benefit.

Platinum is beginning to look more and more like an income stock with the attractive dividend yield backing it. The board reiterated a commitment to distributing future profits in the form of dividends subject to the ongoing capital requirements of the business. Management’s declared full-year dividend of AUD 0.32 equates to an attractive yield of 6.0%, or 8.6% when grossed up for franking benefits, at yesterday’s closing price of AUD 5.29.

Fiscal 2018 highlights the risks and strengths that come with investing in asset managers. The industry continues to face challenges, including the trend away from active and towards passive investing. Underperformance and fee compression continue to threaten profitability, with additional pressures coming in the form of higher salary expenses to retain key personnel. However, we see Platinum's long-term outperformance as difficult to replicate, supporting the strong brand and underlining the firm's competitive advantages in this challenging market. Platinum also stands to benefit from the possibility of improving its international distribution footprint in the U.S. market via a range of investment vehicles due to be launched shortly. Although significant activity has taken place in this area during the year, it is not an imminent driver of group profits, given its respective lead time.