Capitalize for Kids is now in its fifth year of hosting charitable investment conferences, having raised millions of dollars for local charities by bringing together top money managers from Canada and the U.S. and having them share some of their best ideas.
The charity held its 2018 event in late October, with nearly two dozen investment professionals sharing picks. Here are three Canadian money managers and the investment ideas they shared.
Kim Shannon, Sionna Investment Managers
CI Financial Corp., TSE-CIX
Ms. Shannon says contrarian investment managers “learn that assuming things are not as bad as they seem will often pay off over time, as the more balanced truth is eventually revealed.”
Her choice to illustrate this principle is CI Financial Corp., which stumbled this summer when it said a better use of its capital was share buybacks, not dividends, so it was slashing its payout by half. The move came as CI Financial, like its peers, struggles with tough times in the fund-management industry.
Typically, Ms. Shannon concedes, a dividend cut signals weak operations. She prefers, however, to see it as a “talented capital allocator.” (She also acknowledged some history – her firm, Sionna, used to manage money for CI until she severed the relationship in 2006.)
Similarly, the conventional wisdom on the fund industry is negative thanks to regulatory burdens and competitive pressure on fees from low-cost competitors. But, she says, asset managers are still posting profit margins above 30 per cent and can balance fee pressure with synergies from acquisitions and cost controls through adopting new technology.
She says CI Financial, trading around $19 at the time of her presentation (and at $19.70 in midday trading Tuesday) has an intrinsic value of $32, by her calculations. (Not much more, she points out, than what it traded in January.) Its price-to-earnings ratio was just 8.6 at the time of her presentation, versus 14.9 for the broader index.
It is, she said, “a classic contrarian value buy.”
Ryan Marr, Waypoint Investment Partners
Chorus Aviation Inc., TSX-CHR
Chorus, parent of Jazz and operator of Air Canada Express flights, trades at a substantial discount to its peers despite returns that are comparable, plus a further opportunity for growth, Mr. Marr says.
The discount is driven by two misconceptions, he says. One is a perception that its Air Canada relationship is at risk, when actually it’s a strong long-term alliance, he argued, with Jazz operating 735 of Air Canada’s 1,602 daily flights. Few of those routes could reasonably be assigned to another airline, Mr. Marr said. And yet, investors are not pricing in any renewal of the Air Canada-Chorus deal when it expires in 2025, he said.
The other misconception is investors awarding little to no value on Chorus’s regional aircraft leasing business. There’s limited competition for it, Mr. Marr said, with operators worried about relying too much on one lessor of aircraft and seeking new providers of aircraft. It is, he said, “an attractive niche with strong returns and growth profile.”
He says Chorus should trade at $10 a share – roughly 40 per cent upside from Tuesday’s midday price of $7.27 – and investors get a dividend yield of about 7 per cent to wait. “We expect Chorus to generate its market [capitalization] in cash flows and pay out a substantial portion to investors.”
Colin Stewart, J.C. Clark
Information Services Corp., TSX-ISV
Mr. Stewart sees roughly 40-per-cent upside in the Saskatchewan land-registry company, formerly a Crown corporation until its 2013 initial public offering. Information Services has long-term contracts that generate significant cash flow and has high barriers to entry – multiple appealing characteristics, Mr. Stewart said. It trades at a discount because it’s followed by few sell-side analysts and institutional investors. Plus, it’s been hurt by concerns about the Saskatchewan housing market.
However, the company collects revenues from more than Saskatchewan land sales, where it has an effective monopoly and is in year five of a 20-year deal. It also does a variety of corporate and personal-property registry services in the province, and it’s started expanding outside of its prairie home, with a licence to register property in Ontario and deals to acquire technology to serve Canadian lenders. Its strong balance sheet allows for more acquisitions, Mr. Stewart said. Its dividend yield is roughly 5 per cent.
Recent transactions in the registry business have occurred at 25 times EBITDA, or earnings before interest, taxes, depreciation and amortization, but ISC traded for less than eight times EBITDA at the time of Mr. Stewart’s presentation. (The shares were bumped up by about 6 per cent last week on a solid earnings report.)
This, he said, is “an opportunity to buy a high-quality business at a discounted price.”
David Milstead