Significant Investments Will Pressure Future Earnings Amid Revenue Declines

Key Takeaways

• Investment in new sub-advisory line and products increases costs, pressuring short-term earnings before new revenue materializes.
  
• Significant fixed costs and net fund outflows impact net margins, while revenue may suffer from product closures and poor performance.
  
• Cost reductions and new growth strategies position the company for improved returns and stability despite revenue challenges.

Catalysts

A publicly owned hedge fund sponsor.

• The company's growth strategy includes developing a new sub-advisory business line and launching new products, which require significant investment. This could pressure short-term earnings as costs rise before new revenue streams fully materialize.
  
• Turnaround costs have reduced reported net profit, and delayed recognition of these costs due to non-cash accounting adjustments is creating further strain on earnings, potentially compressing net margins.
  
• Despite efforts at cost control, fixed costs remain significant due to ongoing system upgrades and property lease extensions, which could inhibit net margin improvement if revenue growth is slower than expected.
  
• Significant net outflows of funds, primarily attributed to poor relative performance and lower cash distributions, are impacting revenue negatively and highlight the risk of continued underperformance affecting future revenue stability.
  
• The closure of several product offerings, while aiming to reduce complexity, also limits immediate revenue streams from these products, and the expected benefit from portfolio rationalization may take longer to impact overall earnings positively.
  

Platinum Investment Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Platinum Investment Management's revenue will decrease by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.3% today to 28.5% in 3 years time.
• Analysts expect earnings to reach A$31.6 million (and earnings per share of A$0.05) by about February 2028, down from A$45.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$39.9 million in earnings, and the most bearish expecting A$25.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2028 earnings, up from 8.5x today. This future PE is lower than the current PE for the AU Capital Markets industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Platinum Investment Management Future Earnings Per Share Growth

Risks

• The company has successfully implemented cost reductions, achieving a 17% decrease in expenses year-over-year, which is likely to positively impact net margins and boost earnings despite lower revenues.
  
• Platinum Asset Management has maintained a strong dividend yield and possesses a healthy balance sheet with $250 million in cash and $64 million in seed investments, contributing to financial stability and potentially supporting future growth in revenue and earnings.
  
• A new growth strategy is underway with the introduction of a sub-advisory business line and the launch of new products, potentially driving an increase in assets under management (AUM) and revenue growth.
  
• Recent improvements in fund performance, particularly in the International and Asia Funds, suggest potential for enhanced returns, which may attract new investments and mitigate revenue declines.
  
• The company's robust client engagement strategy and indications of continued support from clients, subject to performance improvement, could help stabilize inflows and support revenue figures.

Valuation

• The analysts have a consensus price target of A$0.709 for Platinum Investment Management based on their expectations of its future earnings growth, profit margins and other risk factors. 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$0.62.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$110.6 million, earnings will come to A$31.6 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of A$0.68, the analyst price target of A$0.71 is 3.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.