CIBC: Target at 38$ (from 37$)Continued Execution On Strategic Objectives In Q4
Our Conclusion
As expected, sequential NAV growth was strong at 18%. The company made solid progress in Q4 to expand the volume of third-party AUM in the asset management business. We were encouraged by expense reduction efforts and the resumption of share buybacks. We estimate that Power trades at a 26% discount to its current NAV, which is essentially unchanged from the period prior to the reorganization, despite the reduction in run-rate holdco expenses and a more focused and articulated strategy. We are reiterating our Outperformer rating and raising our price target to $38 from $37 to reflect the NAV growth since our last update.
Key Points
Strong sequential NAV growth, as expected. Net asset value increased 18% on a Q/Q basis, supported by strong performance from the underlying operating subsidiaries. Both Great-West Lifeco (Outperformer rating, $36.50 price target, covered by Paul Holden) and IGM Financial (Outperformer rating, $42 price target) outperformed in Q4, advancing 17% and 13%, respectively, versus the S&P/TSX Composite Index at 8%. NAV growth was also supported by a step-up in the value of other investments, which increased 19%. This appears largely driven by growth in the value of standalone businesses, including the impact of the Lion Electric transaction announced in late 2020.
Taking steps to obtain scale in the asset management platform. Power achieved some encouraging progress towards its objective of obtaining scale in the investment management business (with an emphasis on third-party capital). Sagard Holdings increased its AUM 24% sequentially, including unfunded commitments. The private credit platform significantly expanded the volume of managed assets in the quarter with the first closing of the second credit fund, which achieved commitments totalling US$650 million (including only US$50 million from Power). The Healthcare Royalty fund also announced the final closing of its fund in February 2021 with additional commitments, and Sagard announced the launch of a Canadian mid-market private equity platform with external fundraising efforts expected to begin in the second half of 2021.
Making progress on other fronts as well. POW indicated that it has achieved 61% of its targeted $50 million in annualized expense reductions. This reflects solid progress from the prior quarter at 47%. The NCIB was renewed in February 2021, and POW indicated that it began buying back a modest amount of stock to offset dilution from the exercise of stock options. Corporate liquidity was unchanged sequentially at $1.2 billion, providing ample flexibility to execute on continued share repurchases and the planned redemption of $350 million of preferred shares.