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CI Fund shares climb on income-trust hopes

Analysts becoming more convinced company will jump on bandwagon

Shares of CI Fund Management Inc. have been flying high lately as investors and analysts become excited about the prospect of the fund company turning into an income trust -- a decision that its chief executive officer says could come by year-end.

The stock of the Toronto-based mutual fund company closed at $15.91 yesterday on the Toronto Stock Exchange, off Tuesday's 52-week intraday high of $16.30. The stock action is also taking place on the eve of tomorrow's meeting by shareholders of Assante Corp. to approve of the takeover of their firm by CI.

CI's $846-million deal to purchase Assante -- a financial planning firm with 1,000 advisers and $7-billion in fund assets -- is set to close Nov. 13, and will vault CI to the second-largest independent fund company, with nearly $39-billion in assets, after Winnipeg-based Investors Group Inc.

Analysts are upbeat about CI, but are divided as to whether to buy its stock now because of the runup in its share price that has so far generated a 68-per-cent, one-year total return.

Some are becoming convinced that CI will do the trust conversion -- an idea it has floated -- as early as January.

CI's chief executive officer Bill Holland said yesterday that CI is still in the "exploratory stage" of whether to take the trust route but acknowledged it is "possible" that there could be a decision by the end of the year.

"CI is looking for a structure to get higher after-tax returns to our shareholders," he said.

The trust structure, allowing pretax profit to flow to investors without corporate taxes paid, has become "more compelling" with the new Ontario Liberal government vowing to boost corporate taxes to 14 per cent from 12.5 per cent as opposed to the Conservatives' promise to cut them to 8 per cent, he said.

Any decision by CI to convert to an income trust structure also requires approval of two-thirds of its shareholders. That includes Toronto-based Sun Life Financial Corp., which owns a 34-per-cent stake after selling two of its fund subsidiaries to CI last year. Under a standstill agreement, the insurer cannot increase its interest in CI until July, 2005, unless it bids for 100 per cent of the fund company.

Analysts became more convinced that CI will hop on the income-trust bandwagon after the company mentioned the possibility again in a press release this week on its month-end sales statistics.

But Mr. Holland denied a Merrill Lynch analyst's report suggesting that CI managers have indicated that, if the conversion takes place, the unit value could be $18 or better based on an 8-per-cent yield on an estimated $400-million in 2005 distributable income. "We have no view on what the value would be," Mr. Holland said.

Raymond James Ltd. analyst Dougall MacPhee said he believes there is a "high probability" that CI will convert its stock into an income trust, and that is why he raised his target price yesterday to $17.50 over six to 12 months from $15.75.

"That is what the valuation would imply if it traded on par with other general business trusts so that would equate with roughly 10 times EBITDA [earnings before interest, taxes, depreciation and amortization]," Mr. MacPhee said.

With CI stock in the $16 range this week, he said that a significant proportion of a possible conversion has already been factored into its stock and he would not be inclined to buy CI shares above that level.

However, the analyst said CI is his favourite pick in the fund industry. "They have the best growth profile," he said. "Bill Holland is a clever guy. He seems to have figured out more effectively than everybody else that the mutual fund business is one where you can acquire assets . . . and do deals that are immediately accretive [to the bottom line.]"

In a report, RBC Capital Markets analyst Drew McReynolds said CI would be a "good trust candidate" because it is large, profitable and generating $180-million in free cash flow annually. "We forecast an EBITDA growth rate of 11 per cent over the next three years," he wrote.

Mr. McReynolds estimates that CI -- as a trust -- could be valued between $16 to $18 a share based on a yield of 9 to 10 per cent (versus a yield of 8 to 12 per cent for most business trusts) and based on distributable income of $400-million. Given the uncertainty on a conversion, however, he is still maintaining is one-year target price of $15.50.

The analyst suggested that if Sun Life does support CI in converting to an income trust, that would pour cold water on speculation that the insurer would eventually bid for 100 per cent of CI because it would have to pay a "significantly higher multiple" for the fund company once it has converted.

CI Fund Management Inc.

Through it's wholly owned subsidiary CI Mutual Funds Inc., the company promotes and manages mutual funds and other investment products.

Head office: Toronto

Telephone: 416-364-1145

Web site:

TXS symbol: CIX

Ownership: Sun Life Financial, 33.9%

Employees: 550

Share values

Trailing 12-month earnings per share: 41 cents

52-week intraday high: $16.30

52-week intraday low: $9.20

Last close: $15.91

Change from previous: -5 cents

P/E ratio: 38.8

Dividend, quarterly: 10 cents

Dividend yield: 2.5%

Market cap: $3.8-billion

1-year total return: 68%

5-year average annual return: 39%

Assets under management in mutual and segregated funds: $32.5-billion (as of Oct. 31, '03)

Funds with heaviest weighting in CI Fund

As of Sept. '03; Share holding as a % of total fund value

Concordia Special Growth; 2.9%

Empire Small Cap Equity; 2.8%


© 2007 The Globe and Mail. All rights reserved.

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