Fiera Capital Corporation

• 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).