Description

CI Financial Corp. (“CI Financial” or “CI”) is a large independent Canadian company offering global wealth management and asset management advisory services. The company has operations in Canada, the United States, Australia, and New Zealand and is headquartered in Toronto. The business is comprised of two segments:

1. Asset Management - C$145B in AuM (Q2 2021) and C$1.6B in 2020 revenue: This segment is primality comprised of CI’s fixed income and equity mutual funds, exchange traded funds, and closed-end funds in Canada. Funds are primarily distributed through investment dealers and mutual fund dealers throughout Canada.
2. Wealth Management - C$160B AuM (Q2 2021) and C$585M in 2020 revenue: This segment is primarily comprised of registered investment advisors (RIAs) which offer products and services to meet the investment objectives of clients. RIAs don’t just offer investment products, they provide comprehensive financial advice, including tax management and estate planning. Fees are often charged on the entire net worth of the client instead of just the investment product. CI has been allocating significant capital towards the purchase of U.S. RIAs.

We became interested in CI because of the large insider buying by the CEO and some directors of the company, as well as the seemingly low valuation, with the stock trading at around 7.5x 2022 EPS. Our investment thesis in CI is based on the following components:

1. New CEO: After being run for years by the same management team, a new CEO, Kurt MacAlpine, was hired in September 2019. We have had numerous conversations with Mr. MacAlpine and are impressed by his detailed knowledge of the business and the industry, his strategic vision, and his focus on execution. Since his arrival, CI has added new investment products, modernized its platform, cut a significant amount of costs, repurchased a significant number of CI shares, and embarked on the U.S. RIA diversification strategy. He has also bought a meaningful number of shares personally.
2. U.S. RIA consolidation strategy: Since Mr. MacAlpine took over in September 2019, CI has acquired more than 20 RIAs in the U.S. with total current AuM of C$84 billion at the end of Q2 2021. These acquisitions have significantly changed the profile of the company from one that was almost 100% exposed to the Canadian asset management market to one with over US$196 million in run rate EBITDA coming from U.S. RIAs (around 25% of total EBITDA). U.S. RIAs are great businesses with sticky clients, strong organic growth, low capital intensity, and many potential M&A targets. Over time, we believe the acquired businesses can achieve a higher margin structure through shared services such as payroll, HR benefits, and technology. We also believe there could be revenue synergies with the Canadian asset management segment. We believe the Canadian market is underappreciating CI’s scale and profitability in the U.S. RIA market. For context, Focus Financial Partners (Nasdaq: FOCS), the only publicly traded RIA consolidator in the U.S., trades at approximately 11.5x 2021 EBITDA.
3. Net asset outflows should progressively improve and just turned positive in Q2 2021: CI Financial’s weak valuation is in part due to its historical net outflows in the Canadian asset management segment. Since 2018, net redemptions have averaged approximately C$2.0 billion per quarter. The reasons for this are multifaceted, including a presence in some poor distribution channels, the removal of corporate class structure, and lower relative fund performance due to a value tilt. However, there is reason for much more optimism in the future. A material portion of CI’s mutual fund distribution historically occurred through banks and life insurance companies. These channels have been consistently reducing the sales of third-party funds and focusing on their own funds, which has hurt CI in the recent past. At this point, CI has only C$2.5 billion left in these channels which should alleviate future funds outflows. The company is also adding new products to its portfolio. These products include new fixed income mutual funds managed by DoubleLine Capital, new liquid alternative investments such as gold and cryptocurrencies, and exposure to private equity portfolios managed by Adams Street Partners. Finally, CI may be able to place its investment products through its growing RIA channel in the U.S. Taken together, we believe CI is about to transition from asset outflows to asset inflows, which actually just happened in the just reported Q2 2021 quarter when the company had C$500 million in positive net flows, the first positive quarter since Q2 2017. 
4. Strong FCF and capital allocation policies: Pro forma for the U.S. RIA acquisitions, CI generates levered free cash flow of approximately C$650 million per year. Since CI’s market cap is around C$5.1 billion, this represents a free cash flow yield of 13%, which we think is attractive, particularly as the wealth management segment continues to account for a larger portion of the earnings. We expect management to continue using the free cash flow to acquire RIAs in the U.S. and to repurchase its stock. Since 2020, CI has purchased close to C$500 million worth of its shares in the open market as the board continues to believe the stock is undervalued. In Q2 2021, CI repurchased 6 million shares for C$132 million.
5. Recent listing on the New York Stock Exchange: On November 17, 2020, CI listed on the NYSE. We believe this is an important step as the company seeks to broaden its investor base and increase its corporate profile in the U.S. The RIA business model does not exist in Canada, and we believe the Canadian investor base doesn’t properly value CI’s RIA business. Given that a material portion of CI’s EBITDA and growth will come from the RIA segment, we believe it will be important for the company to broaden its exposure to U.S. investors and this listing is a step in that direction. It also shows management’s commitment to create shareholder value.
6. Industry low P/E multiple: CI Financial’s share performance has lagged the industry considerably through the pandemic and now trades at a P/E of approximately 7.5x versus Canadian industry peers of approximately 10x. We believe this discount is unwarranted given the dynamics mentioned above and we believe CI should trade at a premium to peers.

CI Financial currently trades at a valuation of approximately 7.5x 2022 earnings. As the market fully captures the extent of the strategic initiatives to broaden the product platform, grow in the U.S. RIA market, continue to have positive asset flows, allocate capital effectively, and gain greater visibility in the U.S. market, we expect the company to rerate materially. If we assume a 10 to 11x P/E on 2022 earnings, the stock would trade in a range of C$34 to C$37 per share, implying an upside of approximately 40% at the midpoint of the range. If the market doesn’t rerate the stock on its own, we believe that CI could take steps to highlight the value of its U.S. RIA business by selling or IPOing a piece of it.

Here is an interesting quote from the CEO on the last earnings call:

“The buyback is informed based upon the multiple of which we're trading at. So we've seen the share price improve, but our multiple hasn't expanded at all. And I think one of the things that we see when we look at our share price today, I mean, we're a much stronger, much more stable global diversified business than we were a year ago, and our multiple doesn't look any different. so, we see a huge disconnect internally between the inherent value of our company and what our stock is trading at and we're very comfortable taking advantage of that disconnect for as long as it exists.

So, I would anticipate if the multiple remains consistent with where it is today, you'll see us continue to be an active buyer of our shares for the foreseeable future. I don't think that disconnect will remain intact forever, just given the velocity of changes we're making to Wealth Management. I shared this in the prepared remarks. But we were making $17 million from Wealth Management 2 years ago, today, our run rate is $196 million. I think everyone would say that wealth managers trade at a better multiple than asset managers if you're looking at industry comps, and our multiple hasn't changed at all. So for us, it's really taking advantage of that disconnect and deploying capital in, we think, a very effective way.”

Note that CI trades on the TSX (CIX.TO) and as well as on Nasdaq under the CIXX symbol. In this write up, we refer to the Canadian listing price. 

Catalyst

Cash flow generation, more EBITDA coming from US wealth management, and eventually a partial sale or IPO of the US Wealth management business