Can CI Financial Justify a Premium Valuation?

Includes: BNS, CIFAF
by: Streetwise Blog

By Andrew Willis

CI Financial (OTCPK:CIFAF) will shed its premium price in coming months, as issues with past and present major shareholders take some of the air out of the high-flying money manager.

CI Financial stock was downgraded on Monday by analysts at RBC Dominion Securities, on concerns that the company no longer deserves a valuation well above what investors pay for mutual fund peers such as IGM Financial (OTCPK:IGIFF).

Exhibit A in the case for this negative view is the stand-off between CI Financial and its single largest shareholder, Bank of Nova Scotia (NYSE:BNS). The fund manager has drawn a premium valuation in part due to speculation that Scotiabank will ramp up its stake in the company, currently at 36 percent.

Exhibit B in RBC Dominion's case stems from the fact that the former owner of this stake, Sun Life Financial (NYSE:SLF), is once again planning to launch a mutual fund unit of its own. Sun Life agents have traditionally sold an enormous volume of CI’s funds. If this steady river of business begins to dry up, CI Financial’s revenues will also suffer.

“The combination of investor disappointment regarding an impasse with Scotiabank regarding potential M&A or strategic alliances plus the announcement by Sun Life that it plans to starts its own mutual fund company has likely taken some of the lustre off CI’s otherwise impeccable profile,” said RBC Dominion in a report on Monday.

The investment bank cut its price target on the stock to C$21 from C$24. In the report, RBC Dominion’s analyst said the firm “still believes CI Financial is a well run company with continued solid net sales performance and strong fund performance relative to peers."

Looking ahead, RBC Dominion says CI Financial changes hands at 8.3 times its forecast 2011 earnings before interest, taxes, depreciation and amortization. IGM Financial trades at 7.1 times forecast EBITDA and AGF Management is valued at 5.9 times 2011 EBITDA.