IGM Financial Inc (TSX: IGM) is a leading non-bank-affiliated asset management company in Canada, that provides investment management products and services. The company operates through two operating segments, namely, Investors Group and Mackenzie Financial. Apart from the above two segments, the company has another line of business, i.e. Investment Planning Counsel, which is engaged into several products and support services to several independent financial planners.

Corporate Structure (Source: Company Website)

Investment Rationales

• An Income-play with Consistent track Record of Dividend Payment: Income investor’s looks for stocks with a track record of consistent dividend payment. A part of the net earnings is being distributed (as dividends) to the shareholders as a token of appreciation for contributing to the capital of the business. IGM has an impressive track record of dividend-payout across the economic cycles and paid a regular dividend over the last two decades. At the last traded price, the stock was offering an attractive dividend yield of ~7.1%, which is significantly higher, considering the prevailing interest rates in the economy. The consistent dividend payout indicates that the company has successfully maintained strong cash flow levels across the economic cycles.

Dividend History (Source: Refinitiv, Thomson Reuters)

• Diversified Client Base with Impressive Product Line: The company caters to both retail and institutional clients and offers products and services like mutual funds, institutional advisory, ETFs etc. Under the Wealth Management segment, the business has a strong distribution network, which primarily caters to the Canadian households through their securities dealers, mutual fund dealers and other subsidiaries licensed to distribute financial products and services. The majority of the revenues within the Wealth Management segment are derived from financial advisory services and distributing financial products and services to Canadian households. The Asset Management segment offers services like investment management and represents the operations of Mackenzie Investments.

• Lower Redemption Rate: Historically, the financial industry has seen a higher redemption level during stock market volatility, economic crisis, etc. as the portfolio runs into severe losses. Investors tend to exit the market out of panic and stop their investments during the period. However, with prudent guidance and smart portfolio allocations, very few financial companies tend to retain their AUM levels, and maintains lower redemption levels, amidst a topsy-turvy economic scenario. IGM is one of the few names whose redemptions level stood significantly lower than the industry over a period of time. At the end of June, 2020, the financial industry saw an upsurge in the redemption rate, and the average industry redemption rate stood at ~16.2%. However, IG Wealth’s redemption rate stood at ~10.2%, which was considerably lower than the industry. This shows prudent risk management and impressive fund management of IG Wealth.

Historical Redemption Rate (Source: Company Reports)

• Introduction of Planning and Advisor Portal: The company introduced a cloud-based platformed, namely Conquest planning, in order to strengthen customer relationship management. The above tool is being managed by Salesforce, a leading IT name and can be accessed through a mobile device. The management believes that the above launch would improve efficiency through digitized workflows, as it would access data-driven reporting. The tool possesses an easy to use interface with Simplified Workflows and can be operated remotely by the clients. We believe, the platform would lead to enhanced client’s servicing and would subsequently drive the organic growth. The offering also includes consultation, along with online guidance with AI-driven analysis capabilities and real-time updates. In the recent past, the tool reported more than 9.7 million views.

• Strong Profitability and Return ratios: The group has solid fundamentals and a robust margin profile. The company retained its profitability over the years, which indicates business resiliency and strong performance. Gross margin stood above 60% over the last ten quarters, and operating margin stood above 25% at the same time. The group has maintained a net margin above 20% over the last ten quarters. The company’s return on equity stood robust at roughly 4% and more during the last ten quarters, while return on capital employed stood at 1.2% or more.

Source: Refinitiv (Thomson Reuters), Kalkine Group, ROE and ROIC are not annualized

• Solid AuM Base: IGM reported impressive growth in its Assets Under Management (AUM) despite the current economic turmoil. At the end of September 2020, AUM stood at CAD 196.4 billion, as compared to CAD 185.1 billion, a year ago. The increase was driven by a higher net flow of CAD 308.1 million in September 2020, as compared to an outflow of CAD 44.5 million in pcp. 

• Risk Associated to Investment: The group’s performance is correlated to the performance of the equity market. Due to the volatility in the equity market, the group’s AuM might take a hit, thereby reducing the management fee.

AuM Highlights: September 2020

Source: Company Reports

• IGM reported impressive growth in its Assets Under Management (AUM) despite the current economic turmoil. AUM stood at CAD 196.4 billion, as compared to CAD 185.1 billion, a year ago.
• Within the Asset Management segment, the AUM jumped to CAD 147.3 Billion, from CAD 139.0 billion in pcp. The increase was driven by a higher net flow of CAD 308.1 million in September 2020, as compared to an outflow of CAD 44.5 million in pcp.
• Within the wealth management business, net client inflow stood at CAD 2.4 million, as compared to an outflow of CAD 284 million, a year ago. Wealth Management assets under advisement stood stable at CAD 125.0 billion, against CAD 121.7 billion in Q3FY19. IG Wealth Management net client flows improved on y-o-y basis and fell by CAD 0.6 million, as compared to fall of CAD 137.9 million in September 2019. Investment Planning Counsel net client flows improved drastically to CAD 3.0 million, against an outflow of CAD 147.1 million in pcp.

Q2FY20 Financial Highlights

• IGM reported a stable second-quarter performance, wherein total income stood at CAD 775.497 million, as compared to CAD 803.908 million in pcp. The decrease was majorly attributable to lower admission fees coupled with declining distribution fees and a fall in the net investment income and other.
• The company posted net expense of CAD 544.094 million, lower than CAD 563.152 million in pcp.
• Net earnings, at the end of the quarter, stood at CAD 183.542 million, against CAD 185.124 million in pcp. Earnings per share stood at 77 cents, improved from 68 cents in the previous quarter.
• Assets under management at the end of June 30, 2020, stood at CAD 165.4 billion, reflecting a growth of 12.1% on y-o-y basis.

Q2FY20 Operating Highlights ( Source: Company Reports)

• The company posted a positive client investment return at 9.7%, as compared to a negative return of 11.7% in Q1FY20. Meanwhile, Management believes that momentum is likely to continue in the coming quarters.

Investment Performance (Source: Company Reports)

• The company reported a strong performance from Retail investment fund net sales, which stood at CAD 439 million, higher than CAD 229 million in Q1FY20 and CAD 392 in Q2FY19, respectively. The above growth represents 15th consecutive quarter of positive retail net sales.

Retail Investment Fund Net Sales Quarterly Trends (Source: Company reports)

Top 10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 71.13% of the total shareholding. Power Financial Corp. and BlackRock Institutional Trust Company, N.A. holds the maximum interests in the company at 65.94% and 1.22%, respectively.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology: P/E Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stock Recommendation: The stock corrected 14% so far this year, due to  weak investors' sentiment on account of heightened volatility in the equity market driven by COVID-19. The company reported significant progress with its ongoing focus on the high net worth (HNW) segment across the company’s IG Private Wealth Management business. In FY19, the company derived a whopping 52% of sales from HNW solutions, up from 28% and 36% in FY16 and FY17, respectively. The company reported growth across each and every segment, which reflects the resiliency of the company’s products and higher client’s confidence, which is a key positive.

Around 55% of the total Mutual fund assets were rated 4 or 5 stars, according to Morningstar Canada. Furthermore, the company reported gaining traction from its ETF business, which was launched just three and a half years ago. It has become the sixth-largest in Canada, with ~CAD 5 billion in assets under management across 30 products.

As the overall economy recovers from the current downturn, we expect a growth in the total AUM underpinned by added traction from the retail segment and improved return from mutual funds. Furthermore, we expect solid organic growth from its digital marketing segment.

Further, despite the challenging operating environment, the group continue to distribute the dividend, which is encouraging from an income investor’s point of view. At the last traded price, the stock was offering a dividend yield of 7.1%, which is significantly higher, considering the current interest rate environment in the country.

We have valued the stock using Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like CI Financial Corp, Fiera Capital Corp, AGF Management Ltd etc. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 31.77 on October 09, 2020.

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

*Recommendation is valid at October 13, 2020 price as well.

*Please be aware dividend is variable and not guaranteed.

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.