AGF Management Limited

• Solid improvement expected in retail and institutional net flows should improve both sentiment and valuation on the stock over the next
  12–24 months.
• Over the next 3–5 years, AGF targets C$5b in assets under management in each exchange-traded funds (ETFs) and alternative investments—a significant growth driver in the near term.
• Attractive valuation currently, with a 4.1% dividend yield.

AGF Management Limited is a global asset management firm with C$36.9b in assets under management (AUM). It has a diversified mix of assets, including retail (~C$18b), institutional (~C$11b), high-net-worth (~C$5b) and alternative investments (~C$1b) businesses. AGF has an outsized exposure to global investment, with 65% of retail and institutional AUM invested in foreign securities, which bodes well with the industry trend of higher allocation for global/international products.

Our positive view is based on a few near- and medium-term positive catalysts. First, improving fund performance leading to 60% of AUM above the industry median over three years. Management has demonstrated an improving trend over the past few years. Second, we expect net retail flows to turn positive in 2018, following a number of years with net outflows. Third, the company's C$5b AUM target for each ETFs and alternative investments could generate an extra C$20m wealth management (WM) EBITDA combined (vs our 2017 estimate of C$75.2m in WM EBITDA). Fourth, the company resolved a long-standing dispute with the Canada Revenue Agency—we estimate it could be refunded C$15–30m (C$0.20–0.40/share)—and a court battle with a former employee (who received C$10m in settlement). Lastly, the company has a 32.7% stake in Smith & Williamson, a private UK wealth manager with GBP20.0b in AUM (~C$34.4b). Under an initial public offering or a sale scenario, the potential valuation could be above our current C$267m valuation.

We have a Buy–Above-average Risk rating on the shares and derive our target price of C$9.00 by applying a 6x multiple to our four-quarter-forward adjusted WM EBITDA estimate. We recommend AGF for value investors. First, we believe there is room for multiple expansion given asset management peers trade at 7.7x on average. Second, if we apply 4.1% EV/AUM to AGF's retail assets (ie what CI Investments paid for Sentry Investments), we derive a potential target price north of C$13. Lastly, AGF shares also offer a 4.1% dividend yield.