IGM Financial Inc.

IGM Financial Inc (TSX: IGM) is a leading non-bank-affiliated asset management companies in Canada, which provides investment management products and services. The company operates through two operating segments, namely Investors Group and Mackenzie Financial.

Key Highlights:

• Stable Financials: Despite the ongoing economic slowdown, the company delivered a stable financial performance, which indicates strong operational resiliency. During the third quarter, the company reported an inflow of CAD 408 million, compared to an outflow of CAD 1,116 million in Q3FY19. Net earnings remained higher sequentially at CAD 191 million, versus CAD 184 million in Q2FY20.

Profitability Snapshot (Source: Company Presentation)

• Growth through technology and retail segment: A majority of the revenues are derived through financial advice and distributing financial products and services across Canadian households. We expect higher traction from the retail segment, which would contribute to the overall performance. Furthermore, the industry is witnessing a meaningful growth from the Robo-advice assets under management, and the above trend is likely to remain robust in the foreseeable future.

Source: Company Presentation

Q3FY20 Financial Highlights:

• IGM announced its quarterly results, wherein the company posted total revenue of CAD 790.621 million, stood higher from CAD 744.271 million in the previous corresponding period (pcp). The increase was driven by a significantly higher contribution from net investment income and other and an increase in revenue from net asset management.
• Total expenses stood at CAD 555.319 million, considerably higher than CAD 482.586 million in Q3FY19, due to increase in Operations and support costs, partially offset by a lower Advisory and business development expenses.
• The company’s EBIT stood at CAD 753.4 million, as compared to CAD 744.3 million in the previous corresponding period, supported by improved performance from net wealth & asset management segment.

Quarterly Trends of Adjusted EBIT and EBIT margins (Source: Company Presentations)

• Net earnings stood at CAD 190.913 million, lower than CAD 202.477 million in pcp.              

Q3FY20 Income Statement Highlights (Source: Company Reports)                  

Risks: The performance of IGM’s product relies on the stock market and the current economic scenario. Volatility in the equity market may fuel the redemption rate, which would have a negative impact on the total AUM of the company.

Valuation Methodology (Illustrative): Price to BV based

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

Stock Recommendation: The company’s Mackenzie segment continued strong momentum with a Record-breaking performance during the month of October, which is a key positive and would support the overall company’s performance. Furthermore, the acquisitions of GLC Asset Management and Northleaf Capital Partners is expected to boosts the company’s AUM, adds scale, and enhance the company’s  distribution. The acquisitions are likely to increase product capabilities into private markets which would support the overall performance. We have valued the stock using P/BV based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Investment Banking & Investment Services) median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 33.18 on November 10, 2020.

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

Vermilion Energy Inc.

Vermilion Energy Inc. (TSX: VET) is an integrated oil and gas producing company which operates in full-cycle exploration and production programs. Other activities of the Company include acquisition, exploration, development, and optimization of assets.

Key Highlights:

• Solid Production profile: The company retained its resilient production levels over the years, which indicates strong operational execution. The company reported average production of 97,656 boe/day for the nine months ended September 30, 2020, reflecting a fall of 4% on y-o-y basis, which is decent considering the current downturn. Within Canada region, the company is targeting light oil and condensate-rich natural gas in West Central Alberta and light oil in SE Saskatchewan and several opportunities across Powder River Basin in northeastern Wyoming in the USA. We expect the production is likely to remain stable in the foreseeable future.

Historical Production Highlight (Source: Company Presentation)

• Operational efficiency: The Management has taken prudent steps to reduce its cost structure in order to withstand the current volatility in the commodity prices, which is impressive. The company has reduced its cash outflows by more than CAD 550 million during the first nine months of FY19, which reflects ~30% of initially planned FY20 cash outflows.

Q3FY20 Financial Highlights:

• VET declared its third quarter FY20 results, wherein the company posted petroleum and natural gas revenue of CAD 274.776 million, lower than CAD 391.894 million in the previous corresponding period (pcp). The decline was primarily attributable to a ~12% y-o-y decline in crude oil realized prices.
• Total expenses stood higher at CAD 414.727 million, up from CAD 396.939 million in the previous corresponding period, due to a loss on derivative instruments amounting CAD 35.457 million, as compared to a gain of CAD 54.785 million in pcp coupled with the inclusion of impairment amounting to CAD 47.777 million.
• Net loss widened to CAD 69.926 million, from CAD 10.229 million in Q3FY19.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The Company’s performance is directly correlated with the demand and price of crude oil and natural gas. Any volatility in price and demand for oil and gas would hamper the overall operating performance.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation:  For FY20, the company expects its average production to remain within the range of 94,000 boe/ day to 96,000 boe/ day, comprising of ~55% of Crude oil, condensate and NGLs and ~45% of Natural gas. The company has significant leverage to the recovering global commodity prices, which are expected to support its near-term priority of reducing debt and improve its dividend payout ratio. The management guided that a ~10% increase in the global commodity prices would add over CAD 100 million of free cash flow. We expect, with the gradual reopening of the economic and industrial activities, commodity prices are likely to improve in the foreseeable future, which would improve the realized price of the company. We have valued the stock using Price to CF based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Baytex Energy Corp, ARC Resources Ltd etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 4.46 on November 10, 2020.

VET Daily Technical Chart (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.