Canaccord: Still cheap after stock's resurgence

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Canaccord Genuity Corp. is starting to resemble the global investment dealer that shareholders have long hoped it would become.

The firm's efforts to expand internationally and reduce its dependency on Canada are beginning to pay off, as global capital markets have perked up.

Canaccord's stock has responded, rising by about 50 per cent over the past three months. But that's mere catch-up for a stock that has at times over the past couple of years traded at bargain-basement prices, said Patrick Horan, a principal at Agilith Capital.

"We were looking for reasons to buy it," Mr. Horan said. "We thought the conditions were right this year for a much stronger capital markets business. We thought there'd be more M&A, there'd be more IPO work, and that's good for brokers."

There are some signs that thesis is holding up. Globally, mergers and acquisitions, and initial public offerings, have rebounded so far this year, Geoffrey Kwan, an analyst at RBC Dominion Securities, said in a recent note.

"We believe there are more definitive signs of improving capital markets conditions, particularly in the U.K. and to a lesser extent Canada and the U.S.," he said.

Not so long ago, that wouldn't have made for a great outlook for Canaccord, a firm that suffered for its home bias.

"It focused too heavily on Canada, and they were always kind of a C-player on the brokerage side, pitching penny stocks," Mr. Horan said.

Heavily exposed to Canadian resources, Canaccord's share price plunged along with the fortunes of the energy and mining sectors. From a high of $16.25 in February, 2011, the stock lost 75 per cent of its value in a year and a half.

In an attempt to diversify, the company went on an acquisition spree, highlighted by the $400-million purchase of London-based Collins Stewart Hawkpoint PLC in December, 2011.

Still, the ensuing two years weren't pretty. Many criticized Canaccord management for being undisciplined on costs and for rewarding themselves handsomely, even through tough markets.

Declining revenues in investment banking and wealth management in North America led the company to cut its dividend in half in 2012, a little more than one year after raising the payout.

"That's a complete embarrassment," Mr. Horan said. "These guys actually advise other companies on dividend policy."

But the company has since undertaken to clean up its business, cut costs and establish a foothold in foreign markets, he said.

In the company's fiscal third quarter, ended Dec. 31, 2013, its profit rose 78 per cent from a year earlier to $18.3-million. The U.K. business was Canaccord's largest, accounting for about 40 per cent of total revenues.

"Canaccord's business is much more geographically diversified than before and near-term valuation upside is likely to be driven by improving conditions in the U.K.," said RBC's Mr. Kwan, who recently raised his share price target to $12 from $7.50 and upgraded the stock to "outperform" from "sector perform." Three of the other analysts covering the stock also rate it a "buy," while three maintain "hold" ratings, at an average price target of $9.38.

According to Mr. Kwan, Canaccord is taking advantage of the spike in U.K. equity issuance, which has risen by 135 per cent year to date over the prior year period. Over that time, Canaccord has led at least 10 U.K. deals totalling about $800-million versus four deals worth about $300-million at this time last year, Mr. Kwan said, citing Dealogic figures.

In Canada, where a recovery in capital market activity is somewhat less apparent, Canaccord is nevertheless asserting itself with renewed relevance, Mr. Horan said.

"We're actually seeing them lead deals," he said, noting the firm's roles in Sandvine Corp.'s $33-million bought financing deal that was completed in February, as well as the $100-million Lumenpulse Inc. IPO last month.

Given Canaccord's heightened profile and expanded footprint, there is a strong argument to be made that the company's stock is due for further multiple expansion – a rise in what investors are willing to pay for shares relative to earnings.

Currently, Canaccord trades just above its current book value, which is well below the average of its peers, Mr. Horan said. "It's still very cheap for a brokerage."