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AGF Management: Lowering Fair Value Estimate by 12% on Weaker Performance and Flows

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We’ve lowered our fair value estimate for AGF Management AGF.B to CAD 7.50 per share from CAD 8.50 to account for revised near-term expectations about assets under management, revenue, and profitability since our last update. Our fair value estimate implies a price/earnings multiple of 5.5 times our 2023 earnings estimate and 6.2 times our 2024 earnings estimate. For some perspective, during the past five and 10 years, the shares have traded at an average of 7.4 and 9.5 times trailing adjusted earnings, with the highest and lowest multiples during the past decade being 20.8 and 3.4 times.

We expect full-year top-line growth to be up only slightly in fiscal 2023, aided by stronger revenue growth over the past couple of quarters (which will be diminished by weaker top-line growth in the first and fourth quarters). While we expect periods of positive annual revenue growth during 2023-27, we have included another equity market correction near the end of our five-year forecast, which will stymie top-line growth during 2025-26. The net result is a negative 2.0% compound annual growth rate for revenue during 2023-27 (down from negative 0.1% previously).

Adjusted pretax operating margins are likely to be range-bound between 15% and 25% over our forecast period, compared with 18.6% during fiscal 2022. We expect a more competitive environment in Canada will put some constraints on the operating leverage typically enjoyed by non-bank-affiliated asset managers like AGF Management as they scale up their business in the face of rising markets. That said, the firm should still generate around CAD 55 million in free cash flow annually on average during fiscal 2023-27, with the bulk of that being returned to shareholders as dividends and share repurchases.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Greggory Warren

Strategist
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Greggory Warren, CFA, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the traditional U.S.-and Canadian-based asset managers, as well as Berkshire Hathaway.

Before assuming his current role in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies. Before joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than seven years, covering consumer staples and consumer cyclicals.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago. During 2014-19, Warren was selected to participate on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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