July 24, 2023
Canadian Diversified Financials
Best Ideas and Q2/23 Preview
Our view: Our Top 3 best ideas are: (1) Element Fleet; (2) Brookfield Asset Management; and (3) Brookfield Corp. Element Fleet is our #1 high-conviction best idea as it continues to deliver strong EPS and FCF growth, which should get a further boost from normalizing OEM production. EFN also has strong defensive attributes and remains attractively valued. As we discuss in more detail below, we like BAM for its growth potential and view BN as an attractive contrarian investment idea.
Element Fleet (EFN) is our #1 high-conviction best idea. EFN trades at 14.1x 2024E P/E and 8.5% 2024E FCF yield. Fundamentals remain very strong as EFN continues to win new customers and cross-sell existing customers new fleet services. If we have a recession, we think originations would likely be higher than our forecasts as OEMs may shift sales to fleet management companies if consumer sales weaken.
#2 best idea: Brookfield Asset Management (BAM). Trading at 19.1x 2024E Fee Related Earnings (FRE), while we believe FRE multiple expansion is likely, we think significant valuation upside is likely to be driven by FRE growth, not just fundraising (BAM is targeting another US$100B in fundraising for 2023) but also deploying capital as many strategies generate fee revenues only when capital is deployed. Furthermore, we think BAM is likely to benefit from its 100% asset light (zero principal investments), debt-free balance sheet and 4% dividend yield. Also, if BNRE’s acquisition of AEL is completed, we estimate BAM could see mid-single digit FRE/share accretion, which we think is not reflected in BAM’s share price.
#3 best idea (and contrarian): Brookfield Corp. (BN). BN’s shares trade at a 29% discount to NAV, wider than we’ve seen in over 10-years. While investor concern regarding Real Estate is understandable, BN’s share price implies not just ZERO value for its Real Estate investments, but also an additional 12% discount to its non-Real Estate private investments (e.g., Insurance). We also see potential catalysts (e.g., substantial issuer bid, successful fundraising at BAM).
One rating change: downgrading TMX Group to Sector Perform (was Outperform) on relative returns.
With the recent improvement in TMX’s share price, it now trades at 20x our NTM EPS forecast, slightly above its historical average and we view the risk-reward profile as more balanced. See separate note here.
What we’re focusing on for Q2/23 results:
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BAM/BN – fundraising; deal pipeline/monetization environment; BN Real Estate update.
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EFN – originations; new customer wins/cross-selling fleet services update.
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DFY/IFC – premium growth outlook; Personal Auto results; catastrophe update.
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ONEX/AD.un – investment/monetization insights; NAV growth; fundamentals at key investments.
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POW – private investments performance, including recent Sagard transaction.
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Asset/Wealth managers (IGM/CIX/FSZ/SII) – net sales performance/outlook and M&A. For IGM, IG Wealth new client flows. For CIX, U.S. Wealth integration update.
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HCG/EQB/FN/CHW – outlook on key metrics (e.g., originations, asset growth, loan losses, NIM yields).
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X – trading volume insights (equity, derivatives); listings/financings outlook; M&A; Trayport results.
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ECN – Strategic review update. Triad and Source One/IFG performance and origination pipeline.
Price target changes: BAM (US$45, was US$43); BN (US$52, was US$51); DFY ($46, was $48); EFN ($29, was $28); EQB ($91, was $88); ONEX ($87, was $81); and SII ($51, was $58).
Outperform $91/share (was $88)
Tuesday, August 1
Wednesday, August 2 at 8:30 am ET 416-764-8609
2Our thoughts heading into the quarter
We forecast EPS of $2.53, which is below consensus of $2.59 and compares to $2.64 Q/Q. Our focus will primarily be on: (1) latest developments in its various loan categories, particularly its Alt-A residential mortgage and Commercial Real Estate segments; (2) updates on the integration of Concentra and any changes to its expected financial impact to EQB; and (3) latest credit performance trends and outlook.