IGM Financial Inc.

IGM Financial Inc. (TSX: IGM) is a leading non-bank-affiliated asset manager in Canada. The group is part of the Power Financial group of companies, which includes companies like Great West Life, London Life, Canada Life, and Putnam Investments. The company has two main operating divisions--Investors Group and Mackenzie Financial which provide investment management products and related services. The company has another business segment, namely Investment Planning Counsel, which provides products and support to independent financial planners. 

Key Highlights:

• Total Assets under Management Stood at CAD 173.2 Billion as on August 31, 2020, higher than CAD 170.7 billion recorded at July 31, 2020.
• Gross sales stood at CAD 1,529.8 million during the month of August 2020.

Q2FY20 Financial Highlights: IGM announced its quarterly results, wherein the company posted total income of CAD 775.497 million as compared to CAD 803.908 million in the previous corresponding period (pcp). The decline was majorly attributable to lower administration fees and distribution fees and a fall in the net investment income and other. The company posted net expense of CAD 544.094 million, as compared to CAD 563.152 million in pcp. The company reported net earnings of CAD 183.542 million, as compared to CAD 185.124 million in pcp.

Net client outflows, during the quarter stood at CAD 62 million, as compared to a net client outflow of CAD 500 million in Q2FY19. Assets under management at the end of June 30, 2020, were reported at CAD 165.4 billion, depicting an increase of 12.1% from the previous quarter. 

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the current economic environment, and volatility in the equity markets, the group might face higher redemption, which might lead to a decline in the total Asset Under Management.

Valuation Methodology: Price to Book Based (Illustrative)

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

Stock Recommendation: The stock of IGM corrected ~14% so far this year, due to tepid economic growth coupled with higher a fall in the equities in the recent past. Amidst the ongoing economic jolt, the company reported a monthly growth in the Assets under management, which is impressive. The company provides a wide range of financial products, which are linked to the equity markets. As the equity market is showing signs of recovery, we believe the flows to increase, which in turn result in higher assets under management. Higher AUM would result in a higher management fee. Further, the stock carries a healthy dividend yield of ~7.08%, which is lucrative, considering the prevailing interest rate environment in the economy. We have valued the stock using price to book based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like CI Financial Corp, Ameriprise Financial Inc, Power Corporation of Canada etc. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 32.01 on September 9, 2020.

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

ATS Automation Tooling Systems Inc.

ATS Automation Tooling Systems Inc. (TSX: ATS) operates as an automation solutions provider and has premium clientele across the Globe. The group uses its extensive knowledge base and global capabilities in custom automation, repeat automation, automation products and value-added services, including pre-automation and aftersales services, to cater the manufacturing automation systems and service needs of multinational customers in markets such as life sciences, chemicals, consumer products, electronics, food, beverage, transportation, energy, and oil and gas.

Recently, the company announced a reorganization plan to help mitigate the expected impact of a downturn in its transportation markets brought on by the COVID-19 pandemic. The plan includes the closing of several facilities and reducing workforce primarily in Europe and Asia in order to mitigate the expected impact of a downturn in its transportation markets. Management expects to incur total restructuring costs of approximately CAD 24 million, and the reorganization is expected to stop the future margin erosion of the group.

Q1FY21 Financial Highlights: ATS Automation announced its Q1FY21 results, wherein the company posted revenues of CAD 324.9 million, reflecting a decline of 4% on y-o-y basis. The decline was majorly attributable to lower revenue from transportation and consumer products segment due to lower after-sales services activity coupled with travel restrictions and temporary closures and entry restrictions at some customer sites. As per the market segments, life sciences and energy reported 6% and 5% growth while revenue from transportation and consumer products markets decreased by 23% and 10%, respectively. The company reported EBITDA of CAD 39.2 million, as compared to CAD 47.2 million in the previous corresponding period (pcp). Net income, during the period, stood at CAD 9.8 million, significantly lower than CAD 16.4 million in the previous corresponding quarter.

Q1FY21 Financial Snapshot (Source: Company Reports)

Risks: The Company’s Canadian operations generate significant revenues in major foreign currencies, primarily U.S. dollars. Any fluctuation in the foreign exchange rate may affect the performance. Further, the company might not achieve the desired result from the reorganizing plant. In such a scenario, the company’s performance might affect adversely. 

Valuation Methodology: EV/EBITDA Based (Illustrative)

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

Stock Recommendation: The stock of ATA corrected ~18% so far amid volatility in the equity market. The Company reported a decent topline amidst a challenging environment, which is impressive. The business reported improved numbers from the life sciences and energy segment while transportation and consumer products reported a decline. The Company is focusing on restructuring its business and decided to close several facilities and to reduce the workforce primarily in Europe and Asia in order to mitigate the expected impact of a downturn in its transportation business. The management stated that this action is necessary to align the capacity and cost structure of the business to current and expected conditions in the transportation market. The plan is expected to mitigate against future margin erosion and emerge to serve transportation customer opportunities that are aligned with the group's technologies, capabilities and objectives. The Company has ample liquidity with cash had cash and cash equivalents of CAD 398.6 million, which seems to be enough to meet the near-term requirement. At June 28, 2020, the Company's debt-to-total equity ratio was 0.83:1. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered Martinrea International Inc, Toromont Industries Ltd, and AutoCanada Inc etc., as a peer group. Hence, considering the above facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 17.61 on September 09, 2020.

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

Disclaimer

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