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Platinum’s singular issue By Alan Kohler PORTFOLIO POINT: Investors considering the Platinum float should also think about the key man risk of Kerr Neilson at the helm. Stockbroker Andrew Bell insists Neilson is just part of a very able team. Kerr Neilson, managing director of Platinum Asset Management, has put his high-profile funds management group on the market. The group is planning an IPO in the coming months. Andrew Bell of Bell Potter is handling the float. Today he answers the questions every investor in the float should ask. The interview Alan Kohler: Andrew Bell, what exactly are you selling of Platinum? Andrew Bell: The public offer will comprise 20% of the issued capital at an application price of $5 a share. And how many shares is that? That will be total issued shares of 112 million ordinary shares. So that’s $560 million worth? Correct and that issue will be distributed by Platinum, CommSec and Bell Potter. And if $560 million is 20%, that values the business at $2.8 billion. As I understand it, Kerr Neilson has 77%, which means he’s worth $2,156,000, which is rather a lot. Correct. Would that make him Australia’s richest investor? I guess it does. I’m not in a position to comment on that. I don’t know the answer, but it’s a significant amount of money. But obviously there is a smaller proportion that is realised and there’s a large proportion that is unrealised. On the subject of Kerr Neilson, what’s your counter to the suggestion that the key man risk in Platinum is significant and therefore someone should think twice about investing in it? Look, I think the personnel issue is referred to extensively in the prospectus, but I’d like to make one key point: that I’ve met the management, the investment team of Platinum. It has got significant depth. There are some very able … some very, very competent people there apart from Kerr. They have worked with the organisation for many years – 13 years in fact. And the average service is around five years. The group manages, amongst other things, a number of international trusts, I think seven in total, and each of those trusts has got a separate fund manager. Kerr Neilson himself manages one fund, which is the international fund. He doesn’t manage the Japanese Fund, the Asian Fund, the European Fund. And the performance of those funds, just to get on to the personal issue, have been outstanding so I think one needs to defray that issue a little bit by saying there are key people in the business. As I’ve said, I’ve met the team. I think they’re very, very able and I think there is a good … an excellent spread of talent. So is it your understanding that they actually have employment contracts with Platinum? No employment contracts and no restrictions. No abnormal restrictions. So what sort of notice period? Notice period of one month on either side but I think to go on, it’s important to appreciate the recruitment process at Platinum is different than other money managers. Platinum do not employ people from other money management groups. They train from within. They have taken particular care over the years in recruiting people who can stay the full journey, who can obviously grow with the business and obviously understand the Platinum ethos, and I think the performance of the group and its investment trusts fully verify or at least back up that particular employment arrangement. But in a way that increases Kerr Neilson’s dominance of the group. I mean it’s all about Kerr isn’t it? Well, as I mentioned earlier I think the team is widespread in terms of management. There are the seven funds that are run by seven different money managers. Kerr cannot physically or mentally manage all those funds, so there is a team at the moment that has performed magnificently. I should also point out that the funds management industry has been characterised by what appear to be key man risk and maybe number-one status, and there have been incidents or examples in the past where those people have either retired or moved on to other organisations, and there have been in most cases those organisations have thrived. Perpetual comes to mind. Colonial comes to mind. So to say that they are utterly and completely dependent on the key shareholder, namely Kerr Neilson, I don’t think is correct. Do you know whether there are any restrictions on their own shareholdings: whether they can sell them or not? There are no restrictions. No restrictions. No escrow. So there are no escrows? Do you think that possibly means that there’s an overhang with the stock? What’s your understanding of their intentions? Look, I think it’s been written in the press. Kerr and his management team have taken significant dividends out of this company in previous years. There is not a need for cash. There is not, in my view, any overhang of stock. Over and above that, obviously this issue will raise a significant amount of money for the vendors and I know the team, Kerr included, is committed and obviously passionate about the industry, the business and maintaining the status quo. I suppose the use of Bell Potter and CommSec to help them sell the issue indicates a preference for retail shareholders. Is that correct? Yes. I guess he’s grown his business through that network, both through direct retail investors and indirectly through planners, who have provided the access to that element of the market. Platinum does not manage wholesale money. It does not offer wholesale investment products and, again, I think the rationale has been to distribute this product in this next stage through a retail network. Can we talk a little about the valuation of the stock, how the price that you’ve got – at $5 per share – relates to the profit of the company? Obviously the numbers relate to price/earnings (P/E) multiples, earnings per share (EPS), and dividends per share (DPS). We have taken account of, I guess, peer group comparison. We’ve taken account of obviously the 2006-07 numbers, which are up to end of February. Actual numbers to the end of February and as the document has outlined the EPS of 29.77¢ adjusted for full dilution for options is a bit lower at 28.38¢, providing a P/E of about 17.6. And how does that compare with other fund managers currently selling on the market? Well the peer group, I guess, is dominated by Perpetual. Treasury Group, I think, are in that range. And so what’s Perpetual’s P/E? And those P/Es are 22.6 for Perpetual. That’s bases 2006-07, projected. And 19 for Treasury Group. Other people in that space IOOF, 22.6, HFA 29.9. So on that measurement, obviously this issue is coming in at an attractive prospected P/E. Did you argue, or do you think you could have got more for it? I think it’s important for there to be a sensible after-market, and I think the pricing of this will enable that objective to be satisfied. In addition, the yield will be attractive; that is, the dividend yield. The policy of the company is to pay out 80–90% of its earnings by way of fully franked distributions and that should ensure a dividend yield approximating 5.5% and, again, that will enable Platinum to command a premium in relation to the peer group. Perpetual yield 4.5% and a number of those other groups I refer to yield in the order of 2.5–4.5%. So in all those circumstances, the low P/E of the float and lowish P/E of the float, plus the yield – it looks like being a bit of a stag profit game? It looks like it will support a good after-market I think, and the background market conditions have to be taken into account. You’ve got a sharemarket at the moment that is at or near its record highs. You’ve got a massive amount of liquidity being recycled back into the system through M&A transactions or whatever, and you’ve got superannuation coming into June 30, so obviously the background settings are very attractive. Which raises the question, I guess: is this as good as it gets for a firm like Platinum and are the other people that come into this float buying in at the top? I don’t think they are. I think we’re in a tailwind environment so far as the Platinum business is concerned. The letter from Kerr in the prospectus, I think, outlines some of the attractive issues that we’ve got, namely: ageing population, legislative change supporting superannuation, and an investment environment that favours equities. From that standpoint, I think valuations in our market are still attractive. I don’t think there’s a bubble and I think the growth that Platinum has experienced can certainly continue. Platinum has got where it has through outstanding investment performance. It has outperformed the MSCI in its international fund by a factor of two. By which you mean the Morgan Stanley Capital Index? Correct. And that’s since 1994 and all the investment trusts that they offer have generated superior returns since inception. And again I repeat: they’re all managed by operatives in the firm, not just Kerr. Now the specialty at Platinum has been international stocks. I’ve heard some remarkable estimates of what proportion of international equities funds flow have gone to Platinum. Have you got any ideas on that subject? I think you’re talking about the money that is flowing their way. Yes, is it true that they’re getting 40% of all money going into international equities from the retail sector in Australia? Correct. Look I saw that number. I would say that they’ve had a significant position and I have not really drilled into that figure in great depth but, look, they have had a great brand. They’ve had a fantastic record and I think they have sold their product and service to the planning networks and direct investors in the most professional way that you can do, and that has seen their funds under management grow substantially. You might add as well that they’ve got external investment mandates approximating $3.5 billion and obviously they’ve got their domestic mandates. So what’s the timing of the float? When do people need to apply by and so on? Yes, the issue will open next Monday, April 17, and it will run for approximately four weeks and close on May 10. Minimum subscriptions will be $10,000 and increments of $2000 beyond that and we have got ASX trading likely to commence on May 23. Will clients of Bell Potter and CommSec be preferred? They are managers of the issue and they will be preferred. What does that mean? Just what it says. No but I mean if clients of Bell Potter and CommSec come up with $560 million, does that mean there’ll be nothing left for anyone else? Not quite because Platinum is distributing a significant part of the issue to its clients and subscribers, so the issue will be split basically three ways: CommSec, Bell and Platinum. In equal parts? No. Platinum will take a significantly greater part of the issue, followed by CommSec and Bell. So what, are we talking about half of it or two thirds going to Platinum clients? I’d just say a material amount. And do you know how they will distribute it to their clients? Well they have got obviously an association through the planning network and they will do roadshows around Australia to the planning networks in all the states. So that will be a key part. So over and above the planning group, they’ve got direct investors, you and me, who will be circularised separately and invited to participate so it certainly won’t be a closed shop CommSec and Bell. It will be spread among those three entities. |
