Seeing a “challening environment weighing on asset and management stocks,” Scotia Capital analyst Phil Hardie cut his forecast and target prices for the sector ahead of second-quarter earnings season.
“The operating environment across the asset & wealth management sector has become increasingly challenging as 2022 progresses,” he said. “Equity and fixed income markets sold off through the second quarter and volatility appears to be on the rise. A difficult market backdrop and an uncertain macroeconomic outlook have likely eroded retail investor confidence and negatively impacted industry retail flows. June’s mutual fund sales saw their highest level of net redemptions since the record set in March 2020, and monthly ETF flows experienced the first month of redemptions since 2016.
“The market outlook plays a key role in driving sentiment and valuation multiples across the asset management sector, given that market appreciation/depreciation are the primary drivers for AUM growth and, as a result, earnings and cash flow growth. Elevated macroeconomic uncertainty caused by the risk of a central bank policy mistake, supply chain disruptions, the ongoing war in Ukraine, and inflation have driven fears of an upcoming recession. In this environment, we remain on the sidelines for the asset managers, with the exception of Guardian, which we view as the least sensitive to AUM fluctuations and market outlook.”
Mr. Hardie’s changes were:
- AGF Management Ltd. (AGF.B-T, “sector perform”) to $7 from $8. Average: $7.57.
- CI Financial Corp. (CIX-T, “sector perform”) to $18 from $21. Average; $20.56.
- Fiera Capital Corp. (FSZ-T, “sector perform”) to $9.50 from $10.50.
- Guardian Capital Group Ltd. (GCG.A-T, “sector outperform”) to $43 from $45. Average: $41.67.
- IGM Financial Inc. (IGM-T, “sector perform”) to $42 from $47. Average: $45.29.
“We believe GCG.A’s current valuation discount is too steep to ignore, and that the stock can outperform its peers in both bull and bear scenarios given its limited sensitivity to AUM outlook. GCG.A remains our top small-cap value play, and our scenario analysis further supports our conviction that the current valuation discount is too steep to ignore, with a potential 45-per-cent return on our 12-month target price and a limited 16-per-cent downside risk to our bear case scenario,” said Mr. Hardie.