CI Financial Corp (TSX: CIX) is a diversified wealth management firm and one of Canada’s largest independent asset management companies. CI’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.

Investment Rationale

• CI Financial Shares Recorded a Positive Breakout: On February 03 trading session, shares of CIX registered a positive breakout on the daily price chart, with price crossover the crucial long-term resistance of 200-day SMA and since then the stock has managed to trade above it. At the last close, its shares traded above the crucial long-term as well as short-term support levels of 200-day and 50-day SMAs, which implies a bullish price trend in the stock. Moreover, the leading momentum indicator, the Moving Average Convergence Divergence (MACD) is rising and hovering above the 9-day SMA signal line with the difference between 12-day and 26-day EMAs is positive, which is another bullish indicator. Therefore, prevailing technical indicators indicates a potential upside potential from the current trading levels.

Technical Price Chart (as on February 05^th, 2021). Source: Refinitiv (Thomson Reuters).

• Significant Growth in Free Cash Flow On Q-o-Q basis: The company’s reported free cash flow bolstered 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, positive free cash flow indicates that a company has cash to expand, develop new products, buy back stock, pay dividends, or reduce its debt.

• An Income Play with Dividend Payment History Since 1994: CI Financials stock is offering a decent dividend yield of ~4%, with a track record of consistent dividend payment over the past 26-years. Also, the group’s yield is relatively higher compared to the 3.34% median yield on TSX Composite Index. This is a key positive from the income seeking investor’s standpoint.

Dividend Payment History: Source: Refinitiv (Thomson Reuters)

• Wealth Management Segment Emerging as Key Performance Driver: Wealth Management assets 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. Assets 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 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. 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. 

• US Based Assets are Likely to Increase Two-fold Following the Latest Acquisition: The group announced an agreement under which it will acquire Segall Bryant & Hamill, LLC, a leading high-net-worth-focused registered investment advisor and multi-office institutional investment management firm headquartered in Chicago. This acquisition is expected to double CI’s total U.S.-based assets to US$ 46.1 billion and demonstrates the firm's commitment to continued cross-border growth and unwavering belief in the importance of financial advice, planning and investment management.

• Manageable Debt: 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 standard of less than 3x. A low net debt to EBITDA ratio is generally preferred by investors, 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.

• Strong Competitive Advantage from RoE Standpoint: Return on Equity (RoE) is one of the most important financial ratios and profitability metrics. It measures how profitable a company is for the owner of the investment, and how profitably a company employs its equity. CI Financials RoE is significantly higher, with TTM RoE at 34.1% whereas peers average ROE stood at 8%, implies that the company is generating a gigantically higher return for its shareholders and reflect a competitive advantage for CI Financials investors against the competition.

• Risks Associated with 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 and 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.
• CI’s cash and cash equivalents increased by CAD 91.0 million in the first nine months of 2020 to CAD 209.3 million.
• Free Cash Flow bolstered by 12% on a sequential quarter basis, however 1% lower on a YoY basis.

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 major shareholder in the company holding stake above 4% each. 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: The group reported decent financial performance on a sequential quarter basis. 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 could be a key strategic driver for the company’s future growth.

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 at the lower which has dragged down yields significantly on government and corporate bonds.

Moreover, its shares registered a breakout on the daily price chart, with shares crossover its crucial long-term resistance of 200-day SMA and created a strong long-term support level. Also, the MACD, which is a leading momentum indicator indicating a bullish trend.

Therefore, based on the above rationale, bullish technical signals and valuation, we recommend a “Buy” rating at the closing price of CAD 17.79 on February 5, 2021.

1-Year Price Chart (as on February 05^th, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at February 8, 2021 price as well

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