CI Financial Earnings: Outside Investment and Debt Deleveraging Outweigh Operating Results

While there was little in narrow-moat CI Financial’s CIX first-quarter operating results that would alter our long-term view of the firm, we expect to increase our fair value estimate at least 10% to account for the impact that outside investment and subsequent debt deleveraging will have on our valuation. Asset managers like CI Financial have a high degree of revenue cyclicality and operating leverage, with results tending to be affected by the vagaries of the equity and credit markets. As such, they should not maintain more than low to moderate levels of financial leverage. CI Financial’s net debt load of more than CAD 4.0 billion at the end of the first quarter, most of which was issued to fund its acquisition spree of U.S.-based wealth managers the past several years, was equivalent to a net debt/adjusted EBIDTA ratio of 4.0 times. This was much higher than it should have been for an asset manager, in our view.

We are willing to cut the company some slack, though, as it was in the process of selling off at least 20% of its U.S. wealth-management business via an initial public offering over the next several quarters. It will be able to use some of the proceeds to pay down its debt load and also assign some of that debt to the spun-off operations. However, much like we saw in the aftermath of the 2008-09 financial crisis, the market for realizations is stalled and there seems to be no appetite for offerings with higher levels of debt attached to them. As a result, it was not too surprising that CI Financial announced it has sold a 20% minority stake in the U.S. wealth-management operations to several institutional investors—including sovereign wealth funds, pension funds, and private equity funds—for CAD 1.3 billion ($1.0 billion). This would imply a CAD 6.7 billion ($5.0 billion) equity valuation for the business, which is a net positive for CI Financial’s valuation.