David and Goliath: Hunter Hall and Platinum Asset Management
Damn! If only I hadn’t already used this sumo picture twice this month. It would be perfect for this article. I could use Caravaggio’s David and Goliath, but as the twentieth anniversary of Tiananmen Square was on June 4th I’ll go with this image.
Hunter Hall Limited (HHL.AX) is the David of the Australian funds management industry to Platinum Asset Management Limited’s (PTM.AX) Goliath. While Hunter Hall is David both is terms of size and righteousness, I am primarily interested in which is the better investment. I may want David to win, but who should I put my money on?
At 6′5″ I am a big believer in size matters. While Yoda wisely said “Size matters not”, there are plenty of studies that show people do value size. As a very tall call kid I surrounded myself with saying like, “size matters and it’s not wise to forget it”. While studying psychology I recall reading about a study which asked participants to talk to the doctor in the next room. When faced with two people dressed in white coats the vast majority of participants assumed the taller person was the doctor. I can hear the screams now, “what does this have to do with Platinum and Hunter Hall”. Let me show you.
When faced with two funds management companies investors seem to prefer the larger one. Does size really matter? Hunter Hall has a ninth or 11% of the funds under management (FUM) of Platinum Asset Management. As FUM is the key metric for funds managers, HHL should be worth around 11% of PTM, ignoring growth rates and other factors. What the above chart highlights is that size clearly matters to investors. HHL is priced at almost a third of what they should based on FUM, their enterprise value is only 4% of PTM’s, it should be 11%. Earnings don’t explain the difference, HHL earnings before interest tax and depreciation (EBITDA) is 11% of PTM, i.e. they both earn around the same on their FUM. HHL’s operating cash flow is slightly comparatively higher, so that also doesn’t explain the difference. The final bar, EV/EBITDA, is another illustration that HHL is priced at around a third of what it should be in comparison to PTM.
What can explain this surprising price differential? Could it size, if not in total then to some degree? Time for me to dig deeper as it appears HHL could be an opportunity, but as I said size matters and it’s not wise to forget it.
All analysis and valuation on Hunter Hall International (HHL.AX)
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