April 25, 2022
Canadian Diversified Financials
Q1/22 Preview and Best Ideas
Our View: Increasing macro uncertainty has us taking a slightly more cautious outlook on our coverage. P&C insurance remains our favorite sector due to positive fundamentals, potential catalysts, strong defensive attributes and attractive valuations (Intact is our #1 best idea and Definity is one of our “sleeper” best ideas for 2022). We also like the risk-reward for the exchanges (we upgraded TMX to Outperform). We are slightly more cautious on asset/wealth managers, private equity/alternatives and mortgage stocks, although these sectors have underperformed within our coverage so far this year. For asset/wealth managers, increased market volatility and/or an equity market downturn can negatively impact earnings from worsening net sales (which can take time to recover) and AUM declines. For private equity/alternatives, potentially slowing Fee Related Earnings growth and uncertainty about asset values of private investments (e.g., often less financial data to assess financial performance, financial leverage) can constrain valuations. For mortgage companies, we believe sector valuations reflect increasing concern of a potential housing downturn, which we think are a bit premature.
Intact remains our #1 best idea for 2022 for the reasons noted above.
TMX Group is our #2 best idea, reflecting positive fundamentals, potential catalysts (e.g., M&A) and strong defensive attributes, yet whose P/E multiple is below average vs. recent years. While the current market environment is not favorable for listing revenues, we believe there are offsets (e.g., higher trading/clearing, particularly derivatives with increasing interest rate volatility; Trayport growth).
Element Fleet is our #3 best idea. While the chip shortage is a key short-term headwind, there are early signs that OEM production is improving, sustained evidence of which should be very positive for the stock. In the interim, EFN has delivered accelerating growth in new client wins and cross-sell of fleet services to existing clients. We think EFN offers an attractive blend of: (1) growth; (2) defensive attributes; (3) high FCF funding growth and significant returns of capital; and (4) attractive valuation.
What we’re focusing on for Q1/22 results:
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BAM – updates on the potential asset manager spinoff, fundraising, and deal pipeline/monetizations.
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EFN – origination outlook; new customer wins; other key trends (e.g., service revenues, NIM yields).
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IFC – RSA integration update; premium growth outlook; Personal Auto results.
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ONEX/BBU/AD – investment/monetization insights; NAV growth; fundamentals at key investments.
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POW – signs of further improving fundamentals at IGM and GWO; private investments performance.
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ECN – Triad/Source One and Kessler industry update in light of the changing macro environment.
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X – trading volume insights (equity, derivatives); listings/financings outlook; Trayport results.
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Asset/Wealth managers (IGM/CIX/FSZ/SII) – net sales outlook, expense growth and M&A. For CIX,
their potential U.S. Wealth IPO and new segmentation separating U.S. Wealth and Canada Wealth.
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HCG/EQB/FN/CHW – outlook on key metrics (e.g., originations, asset growth, loan losses, NIM yields).
3 rating changes: AD.un (SP, was OP); AGF.b (U, was SP); and X (O, was SP).
Target changes: AD.un ($24, was $25); AGF.b ($8, was $8.50); BAM (US$72, was US$73); BBU (US$35, was US$41); CHW ($15, was $16); CIX ($26, was $29); DFY ($40, was $35); ECN ($7, was $6.50); EQB ($85, was $96); FN ($43, was $45); FSZ ($11, was $12); HCG ($50, was $56); IGM ($53, was $59); ONEX ($108, was $126); POW ($47, was $48); SII ($67, was $61); and X ($163, was $151).
Intact Financial (TSX: IFC)
Rating: Outperform
12-month price target:$216/share
Reporting date: Tuesday, May 10
Conference call date: Dial-in:
Wednesday, May 11, at 11:00 am ET 1-888-664-6392 or (416) 764-8659
We forecast Operating EPS of $2.63, which is above consensus of $2.55 and compares to $3.78 Q/Q and $2.40 Y/Y. We think that the key focus points in the quarter will be: (1) Personal Auto’s (Canada) combined ratio given the rebound in traffic levels through most of Q1/22 (see our April 3, 2023 RBC Global Traffic Trends note here) and the company’s outlook on premium growth; (2) updates on rate momentum within Personal Property (Canada); (3) U.S. Commercial combined ratio performance; and (4) progress on the RSA integration and incremental disclosures related to the acquisition/de-risking thereof. We note that on April 11, 2022, Intact pre-released Q1/22 catastrophe losses of ~$183MM (see our note here).