CI Financial Corp (TSX: CIX) is a diversified wealth management firm and one of Canada's largest independent asset management companies. CIX's principal business is the management, marketing, distribution, and administration of investment products for Canadian investors. CIX also provides financial advice, tax, retirement, estate, and wealth planning services in Canada through Assante, CIPC, WealthBar, and in the United States through Surevest, One Capital, and Cabana. In addition, CIX has asset management operations in Australia through its subsidiary GSFM. CIX's products are distributed primarily through brokers, independent financial planners, and insurance advisors. CIX operates through two business segments, Asset Management and Wealth Management.

Investment rationale

• Total assets touched all-time high: The company recently reported preliminary assets under management (AUM) for July 2020. The group's AUM stood at CAD 129.1 billion, and wealth management assets stood at CAD 58.2 billion. The total of CAD 187.3 billion stood at an all-time high for the company. In the month of July, the group's assets under management increased by 2.8%, its Canadian wealth management assets increased by 2.2% to CAD 50.1 billion and its U.S. wealth management assets increased by 65.3% to CAD 8.1 billion, reflecting the closing of a previously announced acquisition. CIX's average core assets under management for the quarter-to-date were CAD 123.4 billion, an increase of 4.2% over the average of CAD 118.4 billion for the second quarter of 2020.

• Solid Liquidity: CIX's cash and cash equivalents increased by CAD 411.9 million in the H1FY20 to CAD 530.3 million. The improvement was mainly driven by the issuance of a CAD 450 million debenture, to ensure sufficient liquidity during a period of market uncertainty in anticipation of an upcoming maturity in December.

• Offering a Decent Yield Income: At the last traded price of CAD 19.20 (on August 14, 2020), shares of CIX, offering a decent dividend yield of 3.75%, which is approximately 6.25 times higher against the Canada 10 Year Benchmark Bond Yield of 0.60%. Also, CIX's dividend yield of 3.75% is approximately 1.06 times of the TSX Composite Index's dividend yield of 3.54%, respectively. Further, amid challenging times, the Board of Directors declared a quarterly dividend of CAD 0.18 per share. This reflects the solid financial strength of the company.

• Strong Upside Momentum: CIX shares are trading in an uptrend. At the last traded price of CAD 19.20 (on August 14, 2020, after the market close), shares of CIX traded well above the crucial short-term as well as long-term support level of 20-day, 30-day, 50-day, 90-day and 200-day Simple Moving Averages (SMAs), which reflects a secular uptrend in the stock. Also, the moving averages are rising on the daily price chart, again a positive technical indicator. Also, the leading momentum indicator, Moving Average Convergence Divergence (MACD) is hovering above the 9-day signal line. The difference between 12-day and 26-day EMAs is positive another positive trend. Further, the difference between 21-day and 50-day EMAs is also positive, reflect a strong uptrend in the stock. The 14-day and 9-day RSI, the leading momentum indicator are hovering in a neutral price zone. Therefore, based on the technical standpoint, we believe that the stock is carrying the potential to go further up from the current trading level. 

• Risk Associated to Investment: The company's financial performance is exposed to equity market risk. Any sharp volatility in the financial markets or lack of sustained growth in such markets may result in a corresponding decline in the performance of CI's investment funds and may adversely affect CI's assets under management, management fees and revenues, which would reduce cash flow to CI and ultimately impact CI's ability to meet its financial obligations.

2Q Result Update: (Fig. in Canadian Dollar)

Source: Company Filings

During the quarter under consideration, the group’s net income stood at CAD 119.8 million, which was 7% higher on a YoY basis and remain largely flat against the sequential quarter basis. However, adjusted Net Income for the Q2FY20 was at CAD 120.2 million, down 5% on a quarter-on-quarter basis and 13% on a YoY basis. (Adjusted Net Income defines as net income, net of non-controlling interest, and net of other provisions and adjustments.).

Diluted earnings per share improved 2% on a consecutive quarter basis and 17% against the corresponding previous financial period. And, adjusted earnings per share stood at 0.56 cents per share 3% lower on a YoY basis.

Total average assets under management at the end of Q2FY20 stood at CAD 120,104 million as compared to CAD 130,770 million reported a year-ago period, reflecting an 8% slump on a YoY basis and a decline of 6% on a sequential quarter basis. Core Average Assets Under Management declined 9% on a YoY basis to CAD 118,413 and 7% on a quarter-on-quarter basis.

Total Assets under management decreased 3% year over year due to fund performance and net redemptions of funds, partially offset by the acquisition of WisdomTree Asset Management Canada, Inc., One Capital, and Cabana. Wealth Management assets increased 14% from last year on account of fund performance, and the acquisition of Surevest, One Capital, and Cabana. Total assets, which include mutual, segregated, separately managed accounts, structured products, exchange-traded funds, pooled funds and wealth management assets, stood at CAD 179.4 billion at June 30, 2020, up CAD 2.3 billion from CAD 177.2 billion at June 30, 2019. While the first quarter of 2020 was dominated by anxiety surrounding the initial outbreak of COVID-19 and the ensuing lockdowns and capital market declines, the second quarter demonstrated a remarkable recovery in those markets – even with a resurgence of the virus in the U.S. and renewed lockdown measures.

CIX reported CAD 1.9 billion in overall net redemptions for the second quarter of 2020. CI’s Canadian retail business, excluding products closed to new investors, had CAD 1.0 billion in net redemptions, representing an improvement of a CAD 0.9 billion over the second quarter of 2019. The group’s Canadian institutional business had net redemptions of CAD 0.8 billion, which was driven by one institution transitioning a CAD 0.6 billion mandate to its in-house investment team.

However, despite a challenging business environment, the company-maintained ROE above 35%, for the quarter ended June 30, 2020. The group’s ROE stood at 35.4%, marginally lower on a sequential quarter basis and 240 bps lower on a YoY basis.  Further, the board has declared a dividend of 0.18 cents for the second quarter of FY20, remain flat both on a sequential quarter basis and YoY basis, reflects a strong financial strength of the company.

The company’s long-term debt increased 30% on a YoY basis to CAD 1,988 million and 14% on sequential quarter basis. However, Net Debt/adjusted EBITDA improved by 2% on a quarter-on-quarter basis to 1.83 from 1.86 reported at the end of preceding financial quarter; however; the ratio has deteriorated on YoY basis, from 1.51x at the end of the Q2FY19 to 1.83x at the end of Q2FY20.

The company’s free cash flow during the quarter under consideration deteriorated 12% on a YoY basis to CAD 128.3 million and lowered by 11% on a sequential quarter basis, driven by the net change in non-cash working capital of CAD 90.6 million against CAD 13.3 million net change in the sequential quarter basis

Stock Performance

At the closing (on August 14, 2020), shares of CIX traded approximately 1.54% lower against the previous trading session at CAD 19.20. Over the last year, its shares have tested a 52W high price of CAD 25.81 on February 21, 2020 and a 52W low price of CAD 10.53 on April 03, 2020. At the last closing price, CIX shares have traded approximately 25.61% lower from its 52W high price level and traded approximately 82% above its 52W low price level. This reflects that the stock is tilted towards its 52W High price level, a positive price trend.

1-Year Price Performance (August 14, 2020, after the market close). Source: Refinitiv (Thomson Reuters).

Further, its shares are in upside momentum, and traded approximately 30.17% higher in the last three months, up ~8% over a month and traded slightly higher over the last five trading session. This indicates a positive price trend in the stock. However, the stock is down approximately 12% on a YTD basis.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together form around 34.47% of the total shareholding. Manulife Asset Management Limited and Chang (G Raymond) holds the maximum interests in the company at 5.33% and 4.76%, respectively.  Further, 3 out of top-10 shareholders have increased their stake in the company over the last three months, with Manulife Asset Management Limited and SEB Investment Management AB  are among the top investors in the company which have increased their stakes by 1.41 million and 0.15 million, respectively. The institutional ownership in the CIX stood at 46.33%, and ownership of the strategic entities stood at 9.70% respectively

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): Price to Earnings Based Valuation Metrics

*Note: All forecasted figures have been taken from the Refinitiv (Thomson Reuters)

Stock Recommendation

The group performance was decent in the second quarter of FY20. Further, the company has a consistent track record of maintaining EBITDA margin above 35% since last many quarters and sustained the pace amid challenging business environment and consistently maintained Net Margin above 20% over the last many periods and sustaining the same amid COVI-19 pandemic time as well. Further, the group’s assets at the end of July 2020, touched an all-time high, which suggests investor are gaining confidence in the market. Higher assets are likely to result in a higher fee for the group.

Also, at the current trading level, it is offering a decent dividend yield of 3.75%, which is significantly higher against the Canada 10 Year Benchmark Bond Yield of 0.60%. The attractive dividend yield and track record of consistent dividend payment may keep CIX’s shares in investor limelight, especially income investors.

Further, it shares have recorded relative price strength against the benchmark index and the sector peers, as it shares are up by 5.03% on a YoY basis, outperforming the benchmark index by 2% and sector peers by 4.5%.  Over the past 3-M, and 1-M, its shares have outperformed the benchmark index by 14% and 4% respectively and sector peers by 24% and 12% respectively. This reflects strong relative strength in the CIX shares amid heightened market volatility.

Also, its shares are hovering above the crucial short-term, and long-term support levels of 50-day and 200-day SMA, and also the short-term moving average length and long-term moving average length is soaring higher another positive price trend.

Therefore, based on the above rationale and valuation done using the above methodology, we have given a “Buy” recommendation at the closing price of CAD 19.2 (as on August 14th, 2020, after the market close), with lower double-digit upside potential, based on the NTM Peer’s Average Price to Earnings ratio of 9.77x, on the FY20E EPS. We have considered IGM Financial Inc, Fiera Capital Corp and AGF Management Ltd etc., as a peer group for comparison purpose.

*Recommendation is valid at August 17, 2020 price as well.

*Please be aware dividend is variable and not guaranteed.

Disclaimer

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