Morningstar | Mixed 3Q Results and Rough Start to 4Q Have Us Lowering CI Financial's FVE to CAD 24 per Share
We've lowered our fair value estimate for narrow-moat CI Financial to CAD 24 per share from CAD 28 following mixed third-quarter results, and an extremely difficult start to the fourth quarter, from the Canadian asset management firm. CI Financial closed out the September quarter with CAD 136.5 billion in AUM, reflective of a 1.2% sequential decline, and a 12.2% year-over-year increase, in the company's fund assets. Excluding the acquisitions of Sentry Investments and BBS Securities, which closed during fourth quarter of 2017, the company's AUM declined 2.6% year over year.Organic growth remained in negative territory during the third quarter, with CI Financial reporting another CAD 2.0 billion in outflows. With the company's AUM already down close to 5% since the start of the fourth quarter, and organic growth on a negative trend of late, we've lowered our expectations for AUM and organic growth for the end of both 2018 and 2019. CI Financial's assets under advisement, which includes assets held by Assante Wealth Management and Stonegate Private Counsel, held steady at CAD 44.4 billion at the end of the third quarter.
While average AUM was up 15.0% year over year, third-quarter revenue increased 12.9% as shifting product mix and declining fee rates limited growth in management fees and other revenue. Year-to-date top-line growth of 12.5% remains above our forecast for mid- to high-single-digit revenue growth for 2018, but the firm faces significantly higher hurdles in the fourth quarter, which will bring top-line growth back down closer to our target range.
As for profitability, CI Financial's operating expenses increased at a slightly faster rate than revenue (while its interest expense nearly doubled), leaving year-to-date pretax margins down some 230 basis points to 38.2%. Profit margins have generally been down since 2014, and we expect this trend to continue as we move forward, with year-to-date results more or less tracking with our forecast.
CI Financial is a wealth management firm and an independent investment fund company. The principal business of Co. is the management, marketing, distribution and administration of mutual funds, segregated funds, exchange-traded funds, structured products and other investment products for investors. Co. has two main business segments: Asset Management, which is engaged in the management of families of mutual, segregated, pooled, exchangetraded, and closed-end funds, structured products and discretionary accounts; and Asset Administration, which is engaged in the sale of mutual funds and other financial products, and ongoing service to clients and capital market activities.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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