Analyst Scott Chan sees a hidden gem in Guardian Capital Group Ltd. stock.
The M Partners analyst has initiated coverage on the firm with a "buy" rating, and a one-year target of $9.50 a share.
"Our target implies about a 38 -per-cent return from current levels," Mr.Chan wrote in a research report. "Guardian shares trade similarly to a closed-end fund (due to the long-term holding of Bank of Montreal shares), and therefore trades at a discount compared with its stock price."
The Toronto-based diversified financial services company owns Guardian Capital LP, one of the largest Canadian investment management firms; Worldsource Financial Management, a mutual fund dealership and Guardian Capital Advisors LP, a high net worth investment management firm. Guardian acquired 4.96-million BMO shares in 2001 when it sold its retail mutual fund business to the bank.
"We maintain that the company's stock price is fully supported by its BMO shares... and you essentially get a free call option on Guardian's investment management business," he said.
There is a "large opportunity for share price appreciation as our estimated operating net asset value (at about $14.48 per share) for Guardian is currently trading at a valuation premium of about 100 per cent to the company's stock, he noted.
Improved profit at Guardian Capital Group and Bank of Montreal could provide further potential upside, he added.
Both entities reported strong second-quarter earnings. Guardian reported a "large increase in institutional assets which we believe was attributable to winning new investment mandates," he added.