ETFs And Robo-Advisors Will Crush Future Margins

Key Takeaways

• Persistent client outflows and shifting investor preferences toward passive strategies and digital platforms are reducing Platinum's revenue base and pressuring future growth.
  
• Rising regulatory and compliance costs, along with industry consolidation, threaten Platinum's profitability and challenge the expected benefits of its recent merger.
  
• The merger and operational efficiencies, along with strong fund performance and product diversification, are expected to enhance profitability, competitive positioning, and revenue stability.

Catalysts

A publicly owned hedge fund sponsor.

• The ongoing and intensifying shift of investors from active management to passive vehicles, such as ETFs and index funds, is expected to continue driving persistent outflows from Platinum's key fund offerings, resulting in a shrinking revenue base and sustained management fee compression over the coming years.
  
• Rapid adoption of robo-advisors and digital wealth platforms by retail investors is eroding Platinum's traditional client base, undermining the ability to attract new inflows despite attempts to improve performance and broaden distribution, which will create increasing pressure on future revenue growth.
  
• Elevated client outflows-$4.2 billion in retail net outflows reported this year-reflect multi-year underperformance and corporate upheaval, and are unlikely to be stemmed in the face of greater industry transparency and comparability. This accelerates the risk of further declines in assets under management, exacerbating negative operating leverage and further compressing net margins.
  
• Heightened global regulatory scrutiny and rising compliance costs will disproportionately challenge Platinum after the merger, as a relatively smaller active manager, placing further strain on its cost structure just as integration expenses and ongoing cost-cutting limit flexibility, likely resulting in lower long-term profitability and earnings.
  
• Consolidation in the industry is empowering mega-cap asset managers with greater technological and distribution advantages, meaning Platinum will face steep client acquisition costs and increased marketing expenditures, undermining the anticipated synergy benefits of the merger and increasing the risk that projected cost savings do not translate into sustainable higher earnings.

Platinum Investment Management Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Platinum Investment Management compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Platinum Investment Management's revenue will decrease by 29.3% annually over the next 3 years.
• The bearish analysts are not forecasting that Platinum Investment Management will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Platinum Investment Management's profit margin will increase from 4.4% to the average AU Capital Markets industry of 25.7% in 3 years.
• If Platinum Investment Management's profit margin were to converge on the industry average, you could expect earnings to reach A$12.8 million (and earnings per share of A$0.02) by about August 2028, up from A$6.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.8x on those 2028 earnings, down from 71.0x today. This future PE is greater than the current PE for the AU Capital Markets industry at 22.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.05%, as per the Simply Wall St company report.

Platinum Investment Management Future Earnings Per Share Growth

Risks

• The proposed merger with L1 Capital is expected to be highly earnings accretive and deliver substantial operating cost synergies of 25 to 30 percent on the combined cost base, which could significantly improve operating margins and boost long-term earnings.
  
• The new combined group will have a strong and diversified position across Australian equities, international equities, and alternative assets, allowing for growth in both assets under management and fee revenue through product and channel expansion.
  
• Several Platinum funds, particularly in Asia and sector strategies, have delivered strong investment performance in the year, with four of six products meeting internal targets and five of the funds returning over 15 percent, which may help attract new inflows and stabilize or grow revenue.
  
• Continued strong expense control, with adjusted expenses now only 60 percent of the level two years ago and significant additional cost-saving targets underway, is helping to protect net margins even amid revenue declines.
  
• The planned transition of the Platinum International strategy to L1 International, which has a very strong track record and stable team, may lead to improved fund performance, thereby enhancing client retention, supporting revenue stability, and strengthening the company's competitive position in active management.

Valuation

• The assumed bearish price target for Platinum Investment Management is A$0.53, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Platinum Investment Management's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$0.8, and the most bearish reporting a price target of just A$0.53.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$49.8 million, earnings will come to A$12.8 million, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of A$0.8, the bearish analyst price target of A$0.53 is 50.9% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.