Tuesday, November 23, 2010 02:57 PM
Author: Jonathan Ratner
While a takeover of AGF Management Ltd. appears unlikely in the near future, it is not impossible. In the wake of Bank of Nova Scotia’s acquisition of DundeeWealth Inc., a growing realization of the need for size and scale in the asset management space may force AGF to at least consider its options, according to RBC Capital Markets analyst Geoffrey Kwan.
He upgraded AGF to Outperform from Sector Perform and boosted his price target to $20 from $18, reflecting an 7% increase in 2011 and 2012 earnings per share forecasts.
“As one of few remaining potential ‘partners of size’ following DundeeWealth’s sale, AGF shares may have additional upside potential above our $20.00/share 12-month target in the event it is able to realize strategic value,” Mr. Kwan said in a note to clients.
He believes AGF shares are attractively valued trading at a significant discount to the fund company peer group. The analyst also anticipates that AGF shares will benefit more than others as a result of greater exposure to equities in its asset under management base as the macro environment gradually improves and equity market conditions remain healthy.
Mr. Kwan said net redemption trends could be improving, and although AGF’s fund performance is below its peers, this has improved in the past few months. “We believe fund performance relative to peers is a leading indicator for future net sales,” he said.
So what does Bank of Nova Scotia‘s planned takeover of DundeeWealth mean for CI Financial Corp?
Scotiabank remains committed to its relationship with CI (it owns a 35% stake in Canada’s third-largest fund manager) and a complete takeover at some time in the future, according to BMO Capital Markets analyst John Reucassel. However, he said the timing has probably been pushed out a couple of years.
“While asset management is an attractive business because most of the activities are conducted off balance sheet, acquisition of asset managers can be onerous from a bank capital perspective,” Mr. Reucassel said in a research note.
He explained that mutual fund company balance sheets are overwhelmingly comprised of goodwill and intangible assets, which when consolidated, must be fully deducted (under Basel 3) from common equity to calcultate capital ratios. Therefore, digesting acquisitions of both DundeeWealth and CI could strain Scotia’s capital ratios.
Based on similar multiples to the DundeeWealth transaction, the analyst noted that CI could be valued at $26 to 28 per share, plenty of upside from its current level.