Comments from TD Waterhouse last week
Fiera Capital Corp.
(FSZ-T) C$11.01
Puts and Takes from New Sub-advisory Agreement
Event
Q2/21 conference call
Impact: NEUTRAL
In our view, the key event this quarter was Fiera's ability to secure a subadvisory
relationship with key PM Nadim Rizk. Importantly, Nadim Rizk manages
~33% of Fiera's AUM, with these assets likely representing more than 33% of Fiera's
revenue/earnings. While the new sub-advisory relationship provides continuity and
security for Fiera (as of 2022), it does come at the cost of lower adjusted EBITDA/
EPS and margins. Our revised estimates reflect higher near-term EBITDA margins,
but lower margins in 2022 to reflect the new sub-advisory relationship. Our target
price of $11.50 and HOLD rating are unchanged.
Adjusted EPS of $0.36 was above our estimate of $0.29 (consensus was
$0.30). Adjusted EBITDA (margins) were also a beat at $52.7mm (31.5%) vs.
our forecast of $49.2mm (30.5%). Management deserves credit for managing
expenses, as the LTM adjusted EBITDA margin of 30.7% has been consistently
expanding since Q1/20 (29.2%).
We are estimating an ~100bps adjusted EBITDA margin headwind in 2022
from the new sub-advisory relationship with Nadim Rizk. For details on
the new relationship, see our note here. A portion of the compensation for
Nadim Rizk's team is currently in share-based compensation. Fiera excludes this
expense from adjusted EBITDA and adjusted EPS. In our view, Fiera's earnings
quality will arguably improve in 2022 as this legitimate expense will now move
'above the line' as an external manager fee (within SG&A).
Net flows were weak this quarter at -$1.6bln (-$1.1bln, including committed
but undeployed capital). However, fund performance continues to be very
strong, with 96% of equity AUM and 97% of fixed income above benchmarks
(L3Y). Private assets have shown solid returns over the past year and since
inception. We see potential for the organic flows profile to improve.
Adjusted EPS of $0.36 was above our estimate of $0.29 (also consensus of
$0.30). Higher revenue was partially offset by higher SG&A. A slightly better-than expected
management fee rate and performance fees helped support the topline.
Other revenue was also slightly higher, reflecting an additional $2.7mm in
sub-advisory fees for the recently divested Bel Air business.
Adjusted EBITDA of $52.7mm was above our forecast of $49.2mm and
consensus of $49.4mm. EBITDA margins of 31.5% were higher vs. 28.7% q/q
and above our estimate of 30.5%.
The base management fee rate of 35bps was lower vs. 36bps q/q. This was
expected, given the recent divestments Bel Air, WGAM, and CNR. However, the
base management fee rate was above our estimate of 34bps. Management noted
that net sales and new subscriptions are expected to contribute ~$2.8mm to
annualized revenues (despite net outflows during the quarter). Additionally,
committed but undeployed AUM of $1.5bln is expected to generate ~$14.0mm in
annualized revenue once deployed (expected to build over 2-5 quarters) and
$8mm in one-time transaction fees.
Flows of -$1.6bln were below our nil estimate. This compares against +$3.1bln
q/q and +$1.1bln y/y. Outflows were largely concentrated in the Financial
Intermediaries distribution channel, while the institutional and private wealth
channels saw modest outflows and inflows, respectively. The recently acquired
global equity team (Fiera Atlas) contributed ~US$0.7bln to AUM (up from a
previous estimate of ~US$0.5bln). Fiera expects ~$0.8bln in outflows stemming
from the remaining AUM in emerging markets fund (closed on July 9, 2021).
Fund performance is showing some weakness over the near term, but
remains very strong over the long term. Management attributed the near-term
softness to the reflationary macro-environment. Over the L3Ys, 97% of fixed
income AUM and 96% of equity AUM have outperformed benchmarks, with many
strategies ranking in the first quartile. Private assets have solid returns over the
past one year and since inception.
Debt/EBITDA (excluding convertible and subordinate debentures) was
stable at 2.4x q/q, and down from 3.0x y/y. Management remains comfortable
with current levels, and is considering share buybacks as part of its capital
allocation strategy. Fiera has renewed its NCIB for up to 4.0mm shares (~4% of
shares outstanding); we are now forecasting some buybacks in our outlook.
Outlook
Our revised estimates reflect a slightly higher management fee-rate stemming from an
improved asset mix and higher margins over the near term. We have reduced our 2022
margins to reflect the sub-advisory relationship with StonePine. We expect debt/EBITDA
to continue to improve, absent any M&A, to 2.2x/1.8x in 2021/2022.
TD Investment Conclusion
We value the stability of the management fee rate which speaks to the company's
emphasis on institutional and private client channels, global equities, alternatives,
and multi-asset capabilities. We are encouraged with the improving balance sheet.
We see valuation as fair, with upside if organic growth momentum and earnings
growth improves.
Justification of Target Price
Our $11.50 target price is derived from an 8.0x8.5x multiple (unchanged) on four
quarters forward adjusted EBITDA (ending Q2/22). From this, we remove debt, add back
cash and equivalents, and divide by the total number of shares outstanding (all four
quarters forward ending Q2/22).
Key Risks to Target Price
The key risks to our target price are acquisitions that underperform from an earnings or
growth perspective; not meeting AUM and margin targets; a relatively high level of debt;
potential for the dividend payout to be pressured; a market correction could weigh on
AUM and earnings; net outflows due to poor fund performance or key portfolio manager
changes; regulatory or headline risk; share dilution risk from potential acquisitions;
foreign exchange fluctuations; National Bank is a large customer, shareholder, and key
credit provider; and a dual-class share structure.