- Track record of strong fund performance and excess returns.
- Solid history of dividend increases. Fiera raised its dividend by 5.3% with 2Q18 results, and we expect another 5% increase with 4Q18 results; for 2019,
we forecast a 10% hike. Fiera remains our top dividend-grower pick among asset managers.
- Mergers and acquisitions will likely be a major catalyst for the stock over the next few years—the recent CGOV Asset Management and Clearwater Capital acquisitions (both accretive to adjusted EPS) are clear examples of this. Management is focused on vertical acquisitions that will benefit from leveraging scale, particularly at its US operations.
Fiera Capital Corporation is an independent, full-service, multi-product asset manager with ~C$139b in assets under management (AUM). Fiera was founded in 2003 and became a public company through a reverse takeover of Sceptre Investment Counsel. The company has a dynamic team of more than 750 employees, with 175 investment professionals based in key financial hubs around the globe. Its exponential AUM growth has been fuelled by a solid track record of mergers and acquisitions (M&A) as well as organic growth, supported by good fund performance.
Our positive view is based on several near- to medium-term catalysts. First, we believe M&A will be a key driver in achieving Fiera's C$200b AUM target by 2020. Management has shown the ability to acquire accretively and integrate successfully through a rigorous due diligence process and instilling a 'boutique with benefits' culture. Second, the company is focused on improving efficiencies that will drive adjusted EBITDA margin expansion over the next few years (to 30% by the end of 2019 vs ~25% today). Third, its recent CGOV acquisition (closed May 31) will not only contribute to adjusted EBITDA but also higher average management fees and margins; we do not believe this has been fully reflected in consensus estimates. Fourth, Fiera's attractive private alternatives platform (which invests in infrastructure, real estate, agriculture, etc) should continue to fuel growth over the near to medium term. Lastly, Fiera is expected to reveal its 2022 strategic plan in October. This is a huge undertaking by the firm and will focus on people, processes, product, distribution and innovation.
That said, there are three risks worth monitoring. (1) While National Bank (its largest client with ~C$20–25b in AUM, or 14–18%) has signalled its intention to renew its AUM agreement to 2022, the details have yet to be released. (2) Net debt/EBITDA stands at 2.8x, above the peer group at 1.0–1.5x. (3) The dividend payout ratio (based on 2Q18 adjusted EPS) is 77%, although management believes this will trend to ~60% over the next 12–18 months.
The dividend was recently increased by 5.3% to C$0.20/quarter, and we are looking for another 5% increase with 4Q18 results. Fiera has maintained its dividend policy of increasing dividends by 1 penny every other quarter for the past 5.5 years. Over that timeframe, the stock has yielded 4.2% on average. If we extrapolate this, assuming the same dividend growth trajectory, annualized dividends will reach C$0.96 by the end of 2020. Assuming it yields 4.2%, this gives a valuation of C$22.90, or a potential total return (excluding dividends) of ~26% CAGR over that timeframe. In a more conservative scenario, assuming yields stay at 5% (where the peer group trades), we arrive at a valuation of C$19.20 or an 18% CAGR (excluding dividends) over that timeframe.
Our C$15 target price is derived by applying a multiple to our four-quarter-forward adjusted EBITDA estimate of 10.5x, which is at a slight discount to its historical average of 11.3x. Fiera shares also offer an attractive dividend yield of 6.2% currently (the highest among asset manager peers).
- Numerous growth opportunities, both organically and through the integration of Atkins.
- Implementation of the deferred prosecution agreement could remove the regulatory overhang on the stock.
- Sale of a portion of Highway 407 represents an opportunity to unlock value.
SNC-Lavalin is a fully integrated professional services and project management company operating in over 50 countries, including Canada and the US. It has ownership in key infrastructure projects such as Highway 407 (16.7%) in the Greater Toronto Area. In June 2017, SNC acquired WS Atkins, a design, engineering and project management consultancy serving the infrastructure, transportation and energy sectors. On a pro forma basis, SNC generates 44% of its revenues from the Oil & Gas business, 30% from Infrastructure, 19% from Power (Nuclear and Clean Energy), 4% from Mining & Metallurgy and 3% from its Capital business. SNC has approximately 50,000 employees.
With the acquisition of Atkins, SNC was able to diversify its business away from reimbursable projects (42% of total revenues vs 60% previously) by entering the consultancy business (~28% of total revenues). The resulting business model should lead to higher multiples, in our view. On top of the diversification benefits, the acquisition is also expected to strengthen SNC's presence in the US infrastructure market. More specifically, Atkins already had sizeable resources in the country, which should help SNC generate cross-selling opportunities within its new global platform. Management remains on track to deliver C$120m of run-rate cost synergies by the end of 2018.
The company is well-positioned to grow revenues organically, thanks to the sizeable infrastructure opportunities in the Canadian P3 transportation market amid increased spending at the federal and provincial level. Meanwhile, SNC has also secured large contracts in its Power (fuel channel and feeder replacement contract for Bruce Power's Unit 6, John Hart generating station replacement project) and Oil & Gas (five-year framework agreement in Saudi Arabia to provide international engineering services, exclusive agreement to deliver the Advanced Topping Refinery in the UAE, a major project in Oman) divisions over the past 12 months, which materially improved their prospects. Moving forward, the company's record backlog of C$15.2b should continue to support both revenue growth and margin expansion.
The Canadian government's recent decision to implement the deferred prosecution agreement should eventually allow SNC to settle with the government and remove the regulatory overhang on the stock.
With 2Q18 results, SNC announced its decision to sell 6.76% of its investment in Highway 407 to unlock shareholder value (based on current estimates, we derive ~C$10.70/share although we believe our numbers are conservative). We welcome this decision, as we believe it will enable SNC to demonstrate the intrinsic value of the asset while maintaining a significant investment in it (~10%).
We derive our C$73 target from a sum-of-the-parts model which generates a value of C$42/share for SNC's E&C business and C$30/share for the Capital portfolio. At the current share price, the implied ~C$24/share value for SNC's E&C business represents ~7.7x our 2019 EPS estimate—a significant discount to peers at 12–14x 2019 EPS. Investors would also benefit from an attractive 2.1% dividend yield at the current share price.
|Company||Ticker||Price ($)||Market cap ($m)||Ratingfootnote 3||Target price ($)||Dividend yield (%)||Total expected return (%)||Sector|
|Manulife Financial Corporation||MFC||24.54||48,691||Buy-AAR||29.00||3.6%||22%||Life Insurance|
|Alimentation Couche-Tard Inc.||ATD.B||62.97||35,594||Buy-AAR||70.00||0.6%||12%||Consumer Staples|
|Sun Life Financial Inc.||SLF||53.03||32,190||Buy-AAR||60.00||3.6%||17%||Life Insurance|
|TELUS Corporation||T||48.92||29,219||Buy-AR||53.00||4.3%||13%||Telecom, Media & Tech|
|Algonquin Power & Utilities Corp||AQN||13.61||6,427||Buy-AR||15.75||4.9%||21%||Power & Utilities|
|Uni-Select Inc.||UNS||20.11||849||Top Pick-AR||32.00||1.8%||61%||Consumer Discretionary|
|Transat A.T. Inc.||TRZ||9.10||355||Buy-AR||15.00||–||65%||Transportation & Aerospace|
- Target price change: MFC to $29 (from $28); ATD.B to $70 (from $74); T to $53 (from $52); UNS to $32 (from $33).
- Excluding the Capital Investments Portfolio.
- Most recently announced dividend (annualized).
- AR: Average Risk, AAR: Above-average Risk
Source: Desjardins Capital Markets, Bloomberg, FactSet