Asset Management. 2Q16 update focus on net flows, expenses and margins

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1 JULY 29, 2016 (416) (416) Associate (416) Q16 update focus on net flows, expenses and margins The Desjardins Takeaway We are publishing our 2Q16 asset manager preview. For the quarter, we expect soft industry conditions (year-over-year retail net sales down 65% in 2Q16) to put pressure on the group s results, particularly net flows. Investors will likely also focus on how companies are managing expenses and what impact this may have on margins. We adjusted our estimates to reflect the latest reported AUM and rolled our valuation one quarter forward. As a result, we bumped up our target price on IGM, CI and Gluskin. Fiera Capital remains our top pick. Highlights Exhibit 1: Canadian asset managers recommendations, target prices and key metrics Asset Price Mkt cap P/E (x) EV/WM EV/AUM 1 Div Target (C$) Exp total Rank manager Rating (C$) (C$m) 2017E EBITDA 1 (x) (%) yld (%) Old New rtn (%) 1 Fiera Capital Buy AAR IGM Financial Hold AAR , CI Financial Hold AAR , AGF Hold AAR Gluskin Sheff Hold AAR Sprott Hold AAR NM AAR = Above-average Risk 1 Enterprise value (EV) excludes non-wm businesses. EBITDA (2017) is only for WM businesses and excludes redemption fees Source: Desjardins Capital Markets, company reports In 2Q16, the share prices of asset managers under coverage dropped 4.9%, underperforming the S&P/ TSX Capped Financials Index (-0.2%). Performance of individual stocks varied, led by Sprott (+1.2%, given the precious metals price recovery) while IGM was the laggard in the quarter (-10.1%). For the quarter, we believe investors will focus on four themes/topics: 1. Net flows trend and outlook we are forecasting outflows across the group except for Sprott. We will be looking for management commentary on the near-term outlook. 2. Expense management ability to curtail/manage expenses should market conditions deteriorate. 3. Margin expectations over the next months. 4. Regulatory environment thoughts on recent regulatory communication with regard to mutual fund fees and the potential impact from banning embedded commissions. Sector outlook underweight. Our cautious sector view is predicated on: (1) uncertainty surrounding fee disclosure and best-interest rules; (2) the lack of clarity on the impact of rule changes on corporate class structure; (3) an acceleration of fee compression; (4) intensifying competition from banks and lifecos, as well as among independent asset managers; and (5) mixed net flows trends. We believe that greater clarity on the first two issues, some improvement in the competitive landscape and/or a turnaround in net flows are needed for us to be more constructive on the sector. This report was prepared by an analyst(s) employed by Desjardins Capital Markets and who is (are) not registered as a research analyst(s) under FINRA rules. Please see disclosure section on pages 7 8 for company-specific disclosures, analyst certification and legal disclaimers. 1

2 Exhibit 2: Asset managers quarterly reporting and conference call details Reporting Conference call date Date Time (EDT) Local Toll free Passcode CI Financial 4-Aug-16 4-Aug-16 4pm # IGM Financial 4-Aug-16 4-Aug-16 2pm Fiera Capital 5-Aug-16 8-Aug-16 10:30am # Sprott TBD TBD TBD TBD TBD TBD Gluskin Sheff & Associates Mid-Sep Mid-Sep TBD TBD TBD TBD AGF Management 28-Sep Sep-16 TBD TBD TBD TBD Source: Company reports We show industry net sales and AUM in Exhibit 3. Exhibit 3: Industry net sales and AUM (past eight quarters) Net sales (C$000) 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 (%) (%) Equity funds -275, ,833 3,434, , ,106 1,004, ,327-1,383, Domestic equity -2,072, ,358-2,937,225-5,025,454-3,263,932-3,372,529-3,734, ,074-6 Global & int l equity 2,862, ,453 1,901,683 5,403,966 3,129,899 3,510,845 3,219, , US equity -672,696 1,049,316 3,905, , , , , ,760-4 Sector equity -392, , ,365-2,336-31, , ,697 83,546 1 Balanced funds 11,404,405 8,587,928 20,338,874 13,252,121 6,564,900 6,935,520 8,906,404 5,387, Bond funds 1,014, ,519 1,517, , ,136-91,819 1,706,837 2,193, Specialty funds 690, ,599 1,005,133 1,247, , ,545-19, , Long-term funds total 12,834,720 9,026,213 26,296,096 15,931,392 8,253,956 8,145,218 10,937,629 6,493, Short-term funds total -492, , , , ,453-36,025 80, , All funds 12,342,465 8,158,259 25,417,597 15,799,358 8,899,409 8,109,193 11,018,611 5,594, AUM (C$000) 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 (%) Qoq Yoy Equity funds 369,555, ,231, ,558, ,872, ,605, ,711, ,258, ,340, Domestic equity 194,740, ,937, ,907, ,317, ,866, ,373, ,923, ,932, Global & int l equity 103,309, ,641, ,662, ,616, ,733, ,553, ,276, ,954, US equity 56,386,694 61,075,850 70,909,656 70,026,074 69,652,952 74,861,198 68,675,590 72,046, Sector equity 15,118,681 13,577,052 15,079,123 14,913,358 13,353,107 13,923,594 14,383,300 16,406, Balanced funds 557,996, ,246, ,541, ,763, ,118, ,381, ,283, ,233, Bond funds 141,541, ,171, ,415, ,678, ,837, ,220, ,722, ,504, Specialty funds 21,175,934 22,586,171 23,924,478 24,906,473 23,996,216 24,639,934 19,827,397 12,876, Long-term funds total 1,090,269,168 1,116,235,855 1,195,439,878 1,194,221,302 1,168,557,507 1,205,953,564 1,209,093,187 1,242,954, Short-term funds total 25,765,810 24,718,390 24,391,230 24,382,408 25,138,700 25,177,078 25,101,907 23,988, All funds 1,116,034,978 1,140,954,246 1,219,831,108 1,218,603,710 1,193,696,208 1,231,130,642 1,234,195,094 1,266,943, Source: IFIC, Investor Economics Latest qtr mix Latest qtr mix Yoy Chg (%) Associate 2

3 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 (% of AUM) JULY 29, 2016 Exhibit 4 shows historical percentages of AUM by fund category vs the S&P/TSX Composite. Exhibit 4: Percentage of AUM by fund category vs S&P/TSX Composite 80% % 40% 20% S&P/TSX Composite 0% 8000 Source: IFIC, Bloomberg Bonds & balanced (LHS) Equity (LHS) Money market (LHS) S&P/TSX Composite (RHS) Associate 3

4 Exhibit 5: Estimate revisions AGF Management 3Q FY15 4Q FY15 1Q FY16 2Q FY16 3Q FY16E 3Q FY16E Consensus 2016E 2016E 2017E 2017E WM EBITDA (C$m) WM EBITDA/sh (C$) WM EBITDA mgn (%) AUM (avg, C$b) Total retail net flows (C$m) ,023-1, Cons EBITDA (C$m) EPS (FD) (C$) Debt/cons EBITDA (x) CI Financial 2Q15 3Q15 4Q15 1Q16 2Q16E 2Q16E Consensus 2016E 2016E 2017E 2017E WM EBITDA (C$m) WM EBITDA/sh (C$) WM EBITDA mgn (%) AUM (avg, C$b) Total retail net flows (C$m) 1, ,976 1,572 Cons EBITDA (C$m) EPS 2 (C$) Debt/cons EBITDA IGM Financial 2Q15 3Q15 4Q15 1Q16 2Q16E 2Q16E Consensus 2016E 2016E 2017E 2017E WM EBITDA (C$m) , , , ,117.5 WM EBITDA mgn (%) WM EBITDA/sh (C$) AUM (avg, C$b) Total retail net flows (C$m) Cons EBITDA (C$m) , , , ,332.0 EPS (FD) (C$) Debt/cons EBITDA (x) Sprott 2Q15 3Q15 4Q15 1Q16 2Q16E 2Q16E Consensus 2016E 2016E 2017E 2017E Base management fees (C$m) Performance fees (C$m) Base EBITDA (C$m) Base EBITDA mgn (%) Cons EBITDA (C$m) EPS (FD) (C$) Net flows (C$m) Avg AUM (C$b) Ending AUM (C$b) New Gluskin Sheff + Associates 4Q FY15 1Q FY16 2Q FY16 3Q FY16 4Q FY16E 4Q FY16E Consensus FY16E FY16E FY17E FY17E FY18E Base management fees (C$m) Performance fees (C$m) Base EBITDA (C$m) Base EBITDA mgn (%) Cons EBITDA (C$m) EPS (FD) (C$) Net flows (C$m) Avg AUM (C$b) Ending AUM (C$b) Fiera Capital Corporation 2Q15 3Q15 4Q15 1Q16 2Q16E 2Q16E Consensus 2016E 2016E 2017E 2017E Adjusted EBITDA (C$m) Adjusted EBITDA margin (%) EPS (FD) (C$) Adjusted EPS (FD) (C$) Net flows (C$m) , ,627 2,574 Ending AUM (C$b) Note: Fiscal year-ends are November 30 for AGF, December 31 for CI, Fiera, IGM and Sprott, and June 30 for Gluskin Sheff 1 Wealth management operations only, excluding redemption fees and investment income; 2 Excludes one-time items; 3 Wealth management operations only, excluding redemption fees; 4 Base EBITDA excludes performance fee, other income and related expenses; 5 Base management fee EBITDA is total EBITDA minus performance fee-related EBITDA Source: Desjardins Capital Markets, company reports Associate 4

5 Exhibit 6: Asset manager comps table Mkt Wealth EV/ Div Price cap mgt EV 1 AUM 2 P/EPS (x) WM EV/WM EBITDA 1 (x) AUM 1, 2 yield Canadian firms Ticker (C$) (C$m) (C$m) (C$m) E 2017E E 2017E (%) (%) IGM Financial Inc. IGM ,795 7, , CI Financial Corp. CIX ,424 7, , AGF Management Ltd. AGF.B , Fiera Capital Corporation FSZ , , Guardian Capital Grp Ltd. GCG.A , NM NM NM Gluskin Sheff + Associates GS , Sprott Inc. SII ,000 NM NM NM Aston Hill Financial Inc. AHF ,191 NM NM NM 6.1 NM NM Average Price/op EPS (ex performance fees) (x) EV/base EBITDA (ex performance fees) (x) Operating valuation metrics E 2017E E 2017E Gluskin Sheff + Associates Sprott Inc. NM NM Average Mkt EV/ Div Price cap EV AUM 2 P/EPS (x) EV/EBITDA (x) AUM 2 yield US firms Ticker (US$) (US$m) (US$m) (US$m) E 2017E E 2017E (%) (%) Blackrock BLK ,443 57,288 4,737, Legg Mason Inc. LM ,577 3, , Franklin Resources, Inc. BEN ,526 14, , T Rowe Price Associates TROW ,643 17, , Federated Investors FII ,268 3, , Affiliated Managers Group AMG ,165 8, , Eaton Vance EV ,298 4, , Janus Capital Group Inc. JNS ,761 2, , Waddell & Reed WDR ,472 1,114 95, GAMCO Investors Inc. GBL ,044 1,047 38, NM Average Our enterprise value (EV) and EBITDA for AGF, CIX and IGM exclude non-wealth management businesses (EBITDA also excludes redemption fees); 2 AUM as last reported Source: Desjardins Capital Markets, company reports, Capital IQ, Bloomberg Associate 5

6 Exhibit 7a: Year-over-year stock performance Canadian asset managers vs other Canadian financials Exhibit 7b: Year-over-year stock performance Canadian vs US asset managers SII FSZ IGM AGF/B CIX GS -3.2% -12.4% -15.9% -21.2% 1.5% 23.8% SII FSZ IGM AGF/B CIX -3.2% -12.4% -15.9% 1.5% 23.8% X BMO TD CM RY BNS IAG SPTSX (FIN) SLF SPTSX IFC NA POW GWO PWF MFC -4.8% -6.0% -10.0% -20.4% 17.9% 15.9% 11.4% 9.8% 8.4% 8.1% 7.5% 5.0% 4.7% 3.4% 3.1% 1.4% GS BLK SPX EV GBL FII JNS TROW BEN LM AMG WDR -58.9% -21.2% -24.7% -29.4% -29.6% -2.6% -4.7% -5.8% -8.3% -8.5% 3.7% 7.9% Source: Bloomberg -50% -25% 0% 25% 50% -75% -50% -25% 0% 25% Source: Bloomberg Exhibit 8: Justification of target prices Company Target price (C$) Justification of target price CI Financial We apply an 8.5x multiple to our four-quarter-forward wealth management EBITDA estimate (ex redemption fees), to which we add a value for its non-wealth management business, then subtract debt, add back cash and divide by shares outstanding. IGM Financial We apply a 7.25x multiple to our four-quarter-forward wealth management EBITDA estimate to calculate an enterprise value, then remove debt, add back cash and other investments, then divide by our forecast shares outstanding. Gluskin Sheff & Associates We apply a 9x multiple to our forward base EBITDA estimate and a 4.5x multiple to our forward performance fee EBITDA estimate to derive an enterprise value, then add net cash and divide by our forecast shares outstanding. Our target price implies a combination of our base EBITDA (90%) and performance fee (10%) estimates. Sprott 2.50 We apply an 8.5x multiple to our forward base EBITDA estimate and a 4.25x multiple to a normalized forward performance fee EBITDA estimate to derive an enterprise value, then add net cash and divide by our forecast shares outstanding. Fiera Capital Corporation We apply a 11.5x multiple to our four-quarter-forward adjusted EBITDA estimate, to which we add back cash and JV investment, subtract debt and divide by shares outstanding. AGF Management 5.50 We apply a 4.75x multiple to our four-quarter-forward wealth management EBITDA estimate to calculate an enterprise value, then remove debt, add back cash and other investments, then divide by our forecast shares outstanding. Source: Desjardins Capital Markets Associate 6

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