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 most of the 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

Source: Annual Report FY20

Investment Rationale

• Growing Presence in the US Wealth Management Market: Recently, the company has acquired Brightworth, LLC registered investment advisor with approximately US$ 4.7 billion in assets. Together with Brightworth and other recently announced transactions are expected to more than double CI’s US assets to approximately US$ 55 billion, continuing CI’s rapid growth in wealth management. Brightworth is a dominant player in the US Wealth Management market, which provides comprehensive investment advisory and financial planning services to high-net-worth individuals, families, business owners, trusts, estates, charitable organizations, pension and profit-sharing plans from offices in Atlanta and Charlotte, NC. This transaction is CI’s 16th since it entered the US registered investment advisor market in January 2020. CI’s US expansion reflects its strategic priorities of globalizing the firm and expanding its wealth management platform. This has positioned CI as a dominant player in the US wealth management space. 

• Wealth Management Segment Growing Rapidly: At the end of February 2021, CI reported a record US$ 100 bn AUM in its Wealth Management segment in the history of CI Financials. This AUM was approximately 2.5% higher from January 2021 AUM and nudged by 101.6% or US$ 50.4 billion on a Y-o-Y basis. The annual change is mainly on account of strong organic growth and acquisitions CI has made to expand its wealth management platform in Canada and the United States. It also reflects CI’s execution of its strategic priorities, which are expanding its wealth management platform, globalizing the firm and modernizing its asset management business. Further, Canadian wealth management assets at CAD 69.5 billion were up 2.7% in February and up 41.5% or CAD 20.4 billion from one year ago.

Source: Company Filing

• A Quality Franchise among the Asset Management Industry: CI Financial is a quality franchise with strong competitive moats against the rivals created over periods, and the company is continuously strengthening its competitive advantages through organic and inorganic routes. The company’s competitive advantage can be better understood by throwing some light on the group’s past performance. CI has consistently delivered an EBITDA margin above 30% every year over the last decade and Net Margin above 20% at the same time, regardless of the business cycle and economic conditions. This provides a dominant position within the industry and also shows the management quality that is behind this spectacular performance. Moreover, the company is generating a gigantically higher return for its shareholders, with a Return on Equity of ~31% in FY20, significantly higher than the industry median of 11.5%. More importantly, CI has consistently delivered ROE above 25% each year over the past 7-years and ROE above 20% each year over the past decade. This shows the strong competitive advantage of the company for its investors. 

• An Income Play with Consistent Dividend Payment Track Records: CI Financial has a consistent track record of dividend payment regardless of the economic cycle over the past 20-years. Also, its shares are yielding relatively higher on TSX with a dividend yield of 3.88%, higher than TSX Composite average dividend yield of 3.1%, and against the Canada 10-year Government Bond Yield of 1.52%. A company that has built upon strong fundamentals, generating free cash flows, manageable debt and relatively higher dividend yield tend to remain in the investor’s focus.

Dividend History. Source: Refinitiv (Thomson Reuters)

• CI Financial Stock Hovering in Long-term Bulls Run: CIX shares are oscillating in a strong bull run, with the stock at the last closing price traded well above crucial long-term as well as short-term support levels of 200-day, 50-day, and 30-day SMAs, a bullish technical indicator. Further, the leading momentum indicator MACD is also rising with the difference between 12-day, and 26-day EMA is positive, and the MACD oscillator is hovering above the 9-day SMA signal line, another bullish indicator. Also, a 14-day RSI of 66.98 reflecting a bullish bias in the stock and indicating a potential upside headroom in the stock from the current trading levels.

Technical Price Chart (as on March 12, 2021). Source: Refinitiv (Thomson Reuters)

• Risk Associated with Investments: 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: Q4FY20

Source: Company Filing

• CI’s total revenue was CAD 566.4 million in the fourth quarter of 2020, an increase of 5.6% when compared to total revenue of CAD 536.3 million in the same period in 2019.
• On a consecutive quarter basis, total revenue increased 11.2% from CAD 509.4 million.
• For the quarter ended December 31, 2020, SG&A expenses were CAD 116.7 million, up 2.5% from CAD 113.8 million in the same quarter of 2019 and up from CAD 108.8 million in the prior quarter. The increase in SG&A from the prior year was related to acquisitions made during the year.
• In the fourth quarter of 2020, CI paid CAD 1.4 million in deferred sales commissions, compared with CAD 2.4 million in the same quarter of 2019 and CAD 1.4 million in the prior quarter. Consistent with the Canadian mutual fund industry, CI’s sales into deferred load funds have been steadily decreasing over the past decade.
• Trailer fees were CAD 137.2 million for the quarter ended December 31, 2020, down 6.1% from CAD 146.1 million for the quarter ended December 31, 2019 and up 1.4% from CAD 135.3 million for the quarter ended September 30, 2020.
• Revenues from management fees were CAD 419.6 million for the quarter ended December 31, 2020, a decrease of 6.9% from CAD 450.7 million for the quarter ended December 31, 2019 and an increase of 1.3% from CAD 414.1 million for the quarter ended September 30, 2020.
• Administration fees were CAD 167.9 million for the quarter ended December 31, 2020, an increase of 39.5% from CAD 120.4 million for the same period a year ago and an increase of 31.0% from CAD 128.2 million for the prior quarter. The increase from the prior year was related to higher average wealth management assets and acquisitions made during the year.
• Advisor and dealer fees were CAD 121.4 million for the quarter ended December 31, 2020 compared to CAD 90.2 million for the fourth quarter of 2019 and CAD 94.1 million for the quarter ended September 30, 2020.
• CI generated CAD 570.2 million of free cash flow in 2020, compared to CAD 607.8 million for the same period in 2019. Free cash flow was up CAD 6.3 million vs. Q3-2020.
• CI’s cash and cash equivalents increased by CAD 365.2 million in 2020 to CAD 483.6 million, mainly due to restructuring debt, as described in greater detail below.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 30.69% of the total shareholding. Manulife Investment Management (North America) Limited and Chang (G Raymond) holds the maximum interests in the company at 5.21% and 4.88%, respectively.

Source: Refinitiv (Thomson Reuters)

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

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: CI is one of Canada's largest independent investment fund companies with total assets under management of CAD 236.5 billion at the end of February 2021. Despite a resurgence of COVID-19 cases and renewed lockdowns in many regions, markets trended upward during the fourth quarter of 2020, boosted by growing clarity around the outcome of the U.S. presidential election and significant COVID-19 vaccine progress, which has extended very crucial support to the CI Businesses.

CI Financials reported a decent fourth-quarter report, with record-high adjusted earnings per share of CAD 0.7, Free cash flow up CAD 6.3 million vs. Q3-2020, Adjusted EBITDA up CAD 23.9 million quarter-over-quarter and declared quarterly dividend of CAD 0.18 per share.

CI's U.S expansion reflects its strategic priorities of globalizing the firm and expanding its wealth management platform. This has positioned CI as a dominant player in the U.S. wealth management space.

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.

Therefore, based on the above rationale, bullish technical signals and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 18.56 on March 12, 2021. We have considered IGM Financial Inc, Fiera Capital Corp and Power Corporation of Canada etc., as a peer group for the comparison.

1-Year Price Chart (as on March 12, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 15, 2021 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.