Intact Financial Corporation

Intact Financial Corporation (TSX: IFC) is a property and casualty insurance company which provides written premiums in Canada.

Key Highlights:

• Issuance of CAD 600 million of term-loan: Recently, the company confirmed the issuance of CAD 600 million of unsecured medium-term notes from a syndicate co-led by CIBC World Markets Inc., TD Securities Inc., and National Bank Financial Inc. The funds are expected to use for the previously announced proposed acquisition of RSA Insurance Group PLC at a price consideration of ~CAD 1.25 billion.
• Stable Dividend Growth: The Group has a history of stable dividend payment, supported by impressive cash flows and operational resiliency, which is a key positive. Dividend per share (annualized basis) grew to CAD 3.32 in 2020 from CAD 0.65 per share in 2005, reflecting a CAGR of ~11%. During Q3FY20, the company paid a total dividend of CAD 356 million, higher than CAD 320 million, a year ago.

Source: Company Presentation

• Long-term prospects remain positive: The group is focusing on retaining its market share and is strategizing to grow the business in the foreseeable future through digital engagement, improving customer experiences, scaling its distribution network. Moreover, the future growth would be supported by the company’s deep Claims expertise & a strong supply chain network coupled with strong capital & investment management expertise. IFC expects a ~10% CAGR in NOI per share over the next decade.

Source: Company Presentations

Q3FY20 Financial Highlights:

• IFC declared its quarterly results, wherein the group reported total revenue of CAD 3,127 million, as compared to CAD 2,828 million in the previous corresponding period (pcp). The improvement was driven by higher net earned premiums (CAD 2,864 million versus CAD 2,604 million in pcp).
• Income before income taxes surged to CAD 426 million, significantly higher than CAD 232 million in Q3FY19, supported by higher revenues, slightly lower net claims incurred, net gains versus a net loss, while a higher underwriting expense (CAD 933 million versus CAD 797 million in pcp) remained a drag.
• Net income attributable to shareholders was reported at CAD 334 million, against CAD 187 million in Q3FY19.
• Cash and cash equivalents were reported at CAD 837 million, while the company’s total assets were recorded at CAD 34,110 million.          

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: COVID-19 pandemic could lead to financial losses in the company’s portfolio and a decrease in its net income and book value. Volatility in capital market may affect the group’s performance.

Valuation Methodology (Illustrative): Price to Book Value

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

Stock Recommendation:

The corporation has an inhouse investment management team which offers balanced portfolio support and avoids capital erosion through prudent capital allocation, which is a key positive. Moreover, underlying loss ratio improved by 5.9 percentage points to a strong 55.1% in 9MFY20, primarily aided by lower claims frequency, supported by better weather conditions, coupled with several profitability actions. The stock of IFC has closed above the long-term support levels of 150-days, and 200-days simple moving average (SMA), indicating a bullish price trend. We have valued the stock using Price to book based relative valuation method and have arrived at a target upside of single-digit upside (in percentage terms). For the said purposes, we have considered peers like Element Fleet Management Corp, ECN Capital Corp etc. Hence, considering the above facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 142.91 on January 13, 2021.

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

Fiera Capital Corp

Fiera Capital Corp (TSX: FSZ) is a Canada-based independent, full-service, multi-product investment company. It provides investment advisory and related services to institutional investors, private wealth clients and retail investors, operating through investment management services segment in Canada and the United States.

• An income play:The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient in nature and has reported stable cash flows over the years. Moreover, at the last closing price, the stock of FSZ was offering an attractive dividend yield of 7.29%, which is lucrative amid a low interest rate environment.

Source: Company

• Divesting Bel Air Investment Advisors and Wilkinson Global Asset Management:On January 4th, 2021, the group announced that it has agreed to sell Bel Air Investment Advisors, its ultra-high net worth private wealth platform, to Hightower Advisors. The company also announced the completion of the sale of Wilkinson Global Asset Management, it's New York-based private wealth investment manager, to Wilkinson Global Capital Partners LLC. The aggregate selling price for both transactions is approximately CAD 81 million.

• Increase in Assets under management (AUM): In Q3 2020, the company’s reported total AUM was CAD 177.7 billion, increase by CAD 13 billion or 7.9%, compared to CAD 164.6 billion in Q3 2019. The increase was primarily due to market appreciation of CAD 14.1 billion and gross new mandates of CAD 12.5 billion, which was partially offset by lost mandates of CAD 9.7 billion and redemptions from existing clients of CAD 4.0 billion.

Source: Company

Financial overview of Q3 2020 (In thousands of Canadian dollars)

Source: Company

• In Q3 2020, the Company posted Revenues of CAD 170.7million, which increased by 6.7% compared to CAD 160.0 million in the previous corresponding period. The increase was primarily due to higher base management fees driven by higher average AUM, partially offset by the sale of Fiera Investments LP’s retail mutual funds in the second quarter of 2020.
• The Company reported net earnings attributable to the Company’s shareholders of CAD 4.7 million against a net loss of CAD 4.7 million in the previous corresponding period. The profits were primarily due to increase in revenue, lower accretion and change in fair value of purchase price obligations, partially offset by an increase in selling, general and admin expenses along with higher income tax expenses.

Risk associated with investment

The company is susceptible to various risks and uncertainties, including the risk from the capital market, general economic conditions, and volatility in currencies. A further outbreak of COVID-19 might hinder the consumers' disposable income, which is likely to impact the company's performance adversely.

Valuation Methodology (Illustrative): Price to Boo Value

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

Stock recommendation

The group demonstrates its financial strength through the pandemic mainly because of the depth and diversity of investment strategies, and commitment to delivering outstanding services. The company expects to continue this positive momentum by maintaining their focus and executing priorities supporting its 2022 Strategic Plan. Further, the stock has a decent track record of dividend distribution and offering lucrative dividend yield, which is encouraging from an income investor’s standpoint. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 11.52 on January 13, 2020. We have considered First National Financial Corp, CI Financial Corp, Equitable Group Inc, etc. as the peer group. 

Source: Refinitiv (Thomson Reuters)

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.