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. CI has two reportable segments: a) Asset Management and b) Wealth Management. The Asset Management segment provides the majority of CI’s income and derives its revenue principally from the fees earned on the management of investment funds and other fee-earning investment products. The Wealth Management segment derives its revenue principally from fees and commissions from ongoing service, financial planning and advice (which may include investment management services), and on the sale of investment funds and other financial products.

Revenue Mix

Investment Rationale

• Robust Free Cash Flow: The company’s reported free cash flow increased by 12% on a sequential quarter basis. CI generated a free cash flow of CAD 143.9 million against CAD 128.3 million reported in the previous quarter, driven by better operating cash provided from operating activities. Increasing free cash flow is a sign of healthy financial positions of the company that is thriving in the current environment. Further, higher free cash flow indicates that a company has the cash to expand, develop new products, buy back stock, pay dividends, or reduce its debt.

• A Consistent Dividend Payer: CI Financials stock is offering a decent dividend yield of 4.5%, with a track record of consistent dividend payment over the past 10-years. Also, 4.5% yield is relatively higher compared to the 3.3% median yield on the TSX Composite Index and 0.75% yield on the Canada 10-year Government Bond. This auger well from the income-seeking investor’s standpoint. Further, CI Financials has a gigantically higher dividend coverage ratio of 326.75x on a TTM basis, implies no dividend payment risk in the near future. The dividend coverage ratio measures the number of times that a company can pay dividends to its shareholders. The concept is used by investors to estimate the risk of not receiving dividends. Thus, if a company has a high proportion of net income to its total annual amount of dividend payments, there is a low risk that the business will not be able to continue making dividend payments.

• Wealth Management Segment Emerging as Key Performance Driver: The company recently announced that it has completed the acquisition of four U.S. registered investment advisor (“RIA”) firms, boosting its U.S. wealth management assets by approximately US$ 9.4 billion to US$ 22 billion. Wealth Management asset in the third quarter of FY20, increased significantly by 37% on a YoY basis to CAD 66,127 million as compared to CAD 48,099 million in the same quarter of the previous financial year, and reported a sequential-quarter growth of 23% against CAD 53,875 million reported in the second quarter of FY20. The expansion of wealth management segment is a strategic priority for the company. The 37% increase in wealth management assets from last year was mainly due to the acquisitions of Surevest, One Capital, Cabana, Congress, and BDF. 

• Record High Combined AuM: Following the recent acquisitions, the group’s combined assets under management and wealth management assets to a record total of approximately CAD 228 billion.

• Manageable Debt, Implies No Balance Sheet Risk: Despite a 21% increase in net debt on a sequential-quarter basis to CAD 1,669 million at the end of the September quarter of FY20, the company has maintained quite a decent coverage ratio. Net Debt/EBITDA ratio of the company at the end of Q3FY20 stood at 2.1x, slightly deteriorated on sequential quarter and YoY basis, but still lower than the standard of less than 3x. A low net debt to EBITDA ratio is generally preferred by analysts, as it indicates that a company is not excessively indebted and should be able to repay its debt obligations. Further, the company’s TTM Interest Coverage ratio stood at 12.14x, which implies that the company has adequate resources to cover its debt obligations.

• Delivering Best in Class Return on Shareholder’s Money: Return on Equity (RoE) is one of the most important financial ratio and profitability metrics. It measures how profitable a company is for the owner, and how profitably a company employs its equity. CI Financials RoE is best among its peer group companies, with TTM RoE stood at 34.1% whereas peers average ROE stood at 8%. This implies that the company is generating higher return for its shareholders and reflect a competitive advantage for CI Financial’s investors against the competition.

Source: Refinitiv (Thomson Reuters)

• Key Risks Associated to Investment: CI Financial is exposed to a variety of risks that are inherent in the wealth management business including:
• Market risk - Adverse changes in underlying market factors, such as interest rates, foreign exchange rates, and equity and commodity prices.
• Macro-Economic Risk- CI’s performance is directly affected by the performance of the financial markets which may be influenced by various political, demographic and macro-economic conditions or events, including any political change and uncertainty in the United States and globally.
• Intense Competition- CI operates in a highly competitive environment, with competition based on a variety of factors, including the range of products offered, brand recognition, investment performance, business reputation, quality of service, level of fees charged, and level of commissions and other compensation paid.

Financial Highlights: Q3FY20

Source: Company Presentation.

• The company’s reported revenue for the Q3FY20 stood at CAD 509.4 million, a decrease of 3.6% when compared to total revenue of CAD 528.6 million in the same period in 2019. However, on a consecutive quarter basis, total revenue increased 7.1%. The decrease on a YoY basis was mainly due to lower management fees from lower average AUM, offset by the additions of Surevest, One Capital, Cabana, Congress, and BDF.  The increase on sequential quarter basis was mainly due to higher asset-based revenue from higher average assets, as well as the inclusion of a full quarter’s results of One Capital and Cabana, and the acquisitions of Congress and BDF during the quarter.
• Core average AUM improved 5% on a sequential quarter basis to CAD 124,626 million vs CAD 118,413 million in the second quarter of FY20.
• Total ending AUM at the end of the third quarter of FY20 stood at CAD 128,312 million, improved 2% on a Q-o-Q basis and slightly declined by 1% on a YoY basis.
• For the quarter ended September 30, 2020, CI reported net income attributable to shareholders of CAD 130.6 million (CAD 0.62 per share) down from CAD 139.0 million (CAD 0.60 per share) for the quarter ended September 30, 2019 and up from CAD 120.2 million (CAD 0.56 per share) for the quarter ended June 30, 2020.
• The decrease from the prior year was mainly due to lower management fees resulting from lower average AUM and the increase from the prior quarter was mainly due to higher average AUM and an increase in client-based revenue from the wealth management segment.

Segment Highlights

Asset Management Segment

• Revenues from management fees were CAD 414.1 million for the quarter ended September 30, 2020, a decrease of 8.3% from CAD 451.8 million for the quarter ended September 30, 2019 and an increase of 6.2% from CAD 390.1 million for the quarter ended June 30, 2020.
• As a percentage of core average AUM, SG&A expenses were 0.250% for the quarter ended September 30, 2020, down from 0.290% for the quarter ended September 30, 2019, and down from 0.270% for the quarter ended June 30, 2020.
• Trailer fees were CAD 135.3 million for the quarter ended September 30, 2020, down 7.5% from CAD 146.3 million for the quarter ended September 30, 2019 and up 6.0% from CAD 127.7 million for the quarter ended June 30, 2020.

Wealth Management Segment

• Administration fees were CAD 128.2 million for the quarter ended September 30, 2020, an increase of 11.5% from CAD 115.0 million for the same period a year ago and an increase of 12.6% from CAD 113.9 million for the prior quarter. The increase from both comparable periods was related to higher average wealth management assets, the inclusion of One Capital and Cabana for a full quarter, and acquisitions made during the current quarter.
• SG&A expenses for the segment were CAD 34.3 million for the quarter ended September 30, 2020 compared to CAD 33.5 million in the third quarter of 2019 and CAD 32.7 million in the second quarter of 2020.
• The increase in SG&A from both comparable periods was attributable to acquisitions made in the U.S. registered investment advisor business.

Top-10 Shareholders

Top-10 shareholders highlighted in the below table together holds approximately 28.6% stake in the company. Chang (G Raymond) and Manulife Investment Management (North America) Limited are top two shareholder in the company, holding stake at 4.83% and 4.37%, respectively. Further, the institutional ownership in the company stood at 43.30% and strategic ownership stood at 9.45% respectively.

Source: Refinitiv (Thomson Reuters)

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

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

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: CI Financial reported decent improvement in the third quarter of FY20 after sustaining two consecutive quarters of challenging business conditions due to the outbreak of COVID-19 since February 2020. The performance can be gauged through material improvement in the group’s asset under management base, and free cash flow. Also, expansion in wealth management division through strategic acquisitions and increasing administration revenue is likely to be a key strategic driver for the company’s future growth.

Further, financial markets across the globe enjoyed a period of relative calm since June 2020. 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. Also, US Presidential elections results, and vaccine distribution news has further reduced the volatility in the broader financial markets, and equity markets in many geographies are hitting record highs on increasing hope over fast recovery in global economic dynamics. These events are going to positively impact the CI Financial performance.

Further, the CI Financial shares are yielding relatively higher on the TSX, which augers well for the income seeking investors amid times when there is a lot of cheap money travelling from the central banks, which has dragged down yields significantly on government and corporate bonds.

Therefore, based on the above rationale and valuation, we have given a “Buy” recommendation at the closing price of CAD 16.21 on January 08, 2021.

1-Year Price Chart (as on January 08, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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