TSX Commentary

IGM Financial (IGM) – $42.01 – Most Attractive Risk-Reward Profile Within Fundcos
Outperform, Above Average Risk, Price Target: $55.00
Q4/09 results were in line, but segmented results show higher quality earnings, in RBC CM’s view. Mutual fund division expenses again were lower-than-forecast, particularly non-commission expense with mutual fund margins up over 100bps Q-o-Q. RBC CM is maintaining its $55/share target, Outperform rating. EPS forecasts are largely unchanged (slight increases). RBC CM believes IGM’s shares are undervalued and are its best idea within the fundcos. IGM’s shares trade at 7.3x EV/forward EBITDA, a 2.7x discount to CIX at 10.0x and a slight premium to AGF at 6.6x. However, RBC CM believes this valuation gap is too wide (a 0.5x to 1.0x gap is more appropriate). RBC CM believes one reason IGM historically traded at a discount to CIX was that IGM had the highest AUM base in the industry, questioning how much faster IGM could grow than the industry. IGM still has one of the largest retail AUM bases in the industry, but CIX’s retail AUM base is now third largest in Canada, yet IGM trades at a discount, but delivered almost identical growth and profitability (but consistently also higher margins) in the past several years, something RBC CM forecasts to continue. In the near-term, RBC CM believes IGM’s shares offer the most attractive valuation multiple expansion upside relative to CIX and AGF based on its forecasts for growth and net sales trends. Under a bearish scenario, RBC CM believes IGM’s shares are the most defensive, which was demonstrated again in this last equity market downturn.