CI Financial Corp (TSX: CIX) is a Canada-based financial services provider, which operates through two business segments: Asset Management and Wealth Management.  The company also offers financial advice, tax, retirement, estate and wealth planning services in Canada through Assante, CIPC, CI Direct Investing, and in the United States through Surevest, One Capital, Cabana, Congress, and BDF. The company derives its majority revenue from the Asset Management segment, which is engaged in the fees earned on the management of investment funds and other fee-earning investment products.

Investment Rationale:

• Total assets reached record CAD 202 billion:The company recently reported preliminary assets under management (AUM) for October 2020. The group AUM stood at CAD 125.4 billion and wealth management assets stood at CAD 77 billion, which resulted in the total assets of CAD 202.4 billion. This represents all-time month-end highs for wealth management assets and total assets for the company. 

Source: Company Reports 

• Enhancing presence in the US through acquisitions: The Company announced that it is going to acquire majority ownership of RGT Wealth Advisors, LLC ("RGT"), a Dallas-based registered investment advisor ("RIA") with approximately USD 4.7 billion in wealth assets. This is the company's 10th direct US wealth management acquisition this year and 13th overall. The addition of RGT, along with previous acquisitions, would increase the company's total US wealth assets to approximately USD 21 billion.

• An income play: The company has a strong history of dividend payment, which establishes the fact that the company's business is resilient and has generated a stable cash flows over the years. The group declared a quarterly dividend of CAD 0.18 per share. The stock is offering a dividend yield of 4.12%, which is lucrative, considering the current interest rate environment.

Dividend Payment History (Source: Refinitiv, Thomson Reuters)

• Solid Fundamentals: The company is built upon strong fundamentals and continuously maintained a stable margin profile over the periods. The company consistently maintained EBITDA margin and Operating margin close to or above 35% each, and net margin above 20%, which is commendable. Further, the group maintained a robust RoE and RoIC profile since March 2017 quarter.

Source: Refinitiv (Thomson Reuters), Kalkine Group, RoE and RoIC numbers are not annualized

• 3QFY20 Result outperformed the Industry: The company reported a decent result and outperformed the industry median on various parameters. The company reported an EBITDA margin of 40.2%, while industry median stood at 33.8%. The company’s operating margin came in at 38.1% (Industry median 30.5%), Net margin at 25.6% (Industry median 21.4%) and RoE at 8.6% (Industry median 4.0%)

Source: Refinitiv (Thomson Reuters), Kalkine Group

• Stable Cash Flow generation: The group has generated a stable free cash flow in the recent past, which reflects operational resiliency and stable demand of the company’s products. The company has focused on prudent shifts in investor preferences through evolving demographics and offering innovative servicing and support. We expect the corporation would likely to report its stable cash flow levels through investment platform enhancements, corporate rebranding and prudent Wealth Management Strategy. Free cash flow during 9MFY20 is reported at CAD 416 million, slightly lower than CAD 434.8 million, a year ago, which is impressive looking at the current economic scenario.

Source: Company Reports

• Consistent decrease in selling, general & administrative expense: The company reported a consistent decline in its selling, general & administrative expenses (SG&A) in the recent past, which augurs well for the company’s margins. Within the asset management segment, the company reported its SG&A expense of CAD 78.4 million, significantly lower than CAD 94.5 million in Q3FY19. The decline was primarily due to a lower variable SG&A resulting from lower average AUM and prudent expense management, offsetting by added acquisitions expenses. With respect to AUM, SG&A of asset management segment stood at 0.25% at the end of Q3FY20, down from 0.27% in Q2FY20 and 0.29% in Q3FY19. Moreover, the company has maintained a stable SG&A expense within its wealth management segment during the last few quarters, which is impressive.

Source: Company Presentation

• Insiders remained net buyer: Insiders remained net buyers so far this year. More importantly, insiders increased their stake in the group during or after the freefall took place in the stock price in March 20 owing to COVID-19 pandemic. The company’s insiders used the free fall in price as an opportunity to accumulate more shares at a lower price. This reflects that the insiders are confident on the business, which is a key positive. We know that the insiders are well informed about the Company’s business prospect better than the ordinary shareholders, hence an increase in the overall position indicates a positive business outlook.

Source: Refinitiv, Thomson Reuters 

• Price hovering above the technical support level: The stock of CI gained ~12.4% in the last one month and closed above the crucial support levels of 30-days, 50-days and 200-days simple moving average (SMA), indicating a bullish price trend. The above trend suggests a higher investor’s interest on account of improving fundamentals, AUM growth, combined with the company’s focus on modernizing its asset management business.

Source: Refinitiv, Thomson Reuters

• Risk associated with investment: The group’s financial performance is exposed to equity market risk. Any sharp volatility in the financial market or lack of sustained growth in such markets may result in a corresponding decline in the performance of the company’s Investment funds and may adversely affect its AUM, management fees and revenues.

Financial overview

Source: Company

• The group reported total revenue of CAD 509.4 million in Q3 2020, decreased by 3.6% as compared to CAD 528.6 million in the previous corresponding period primarily due to lower management fees from lower average AUM, partially offset by the acquisitions made by the group.
• PBT reported by the company in Q3 2020, stood at CAD 176.3 million, decreased by 5.3%, as against CAD 186.2 million in Q3 2019, primarily due to lower revenue, partially offset by low SG&A expenses and lower trailer fees.
• In Q3 2020, the company posted net income attributable to shareholders of CAD 130.6 million, decreased by 6%, as compared to CAD 139 million in the previous corresponding period due to the reasons discussed above.
• The company reported cash and cash equivalent of CAD 209.329 million, higher than CAD 118.360 million in FY19. Total assets were recorded at CAD 5,043.896 million, higher than CAD 4,367.806 million in FY19.
• Dividends paid to shareholders stood at CAD 117.540 million for 9MFY20, slightly lower than CAD 129.645 million, a year ago.

Guidance

The company would be focusing on increasing its depth and breadth of research coverage, leveraging scale across all investment teams in order to improve its investment products. Furthermore, the Management is strategizing on centralizing its trading desk and office location for the investment team, fostering better connectivity and collaboration. CIX would leverage additional resources and intellectual capital to make more informed investment decisions, which augurs well for AUM growth. 

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 30.76% of the total shareholding. Chang (G Raymond) and Manulife Investment Management (North America) Limited hold the maximum interests in the company at 4.81% and 4.35%, respectively.

Source: Refinitiv (Thomson Reuters)

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

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock recommendation

Equity prices in many markets continued to improve from the pandemic-related sell-off in the first quarter, with some sectors moving sharply higher as lockdown restrictions eased and economic activity gradually resumed. This is positive for the group as it may see more participation from the clients, helping in generating more management fees and admin fees. In October 2020, the group’s Total assets reached record CAD 202 Billion levels, and on top of this, the company is regularly making acquisitions in the US to mark a substantial presence.

In Q3 2020, the company repurchased 4.3 million shares at the cost of CAD 77.7 million, while during the nine months ended 30th September 2020, group repurchased 12.2 million shares under its normal course issuer bid at a total cost of CAD 228.1 million or CAD 18.62 per share.  This buyback reflects the confidence and optimism of the management in the company. Moreover, the stock is offering a decent dividend yield amid low interest rate environment.

Therefore, based on the above rationale and valuation, we have given a “Buy” rating at the closing price of CAD 17.45 on November 27, 2020.

CIX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

*Recommendation is valid at November 30, 2020 price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.