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Doubts persist despite AGF turnaround

Street questions whether profit can be improved


The worst is over for AGF Management Ltd. but there are lingering concerns on Bay Street that the mutual fund company will be challenged when it comes to improving its bottom line.

A dramatic recovery in mutual fund sales and improved returns for its portfolio of retail funds are "positives" for the Toronto company, said Karin Huo of Genuity Capital Markets. Nevertheless, AGF's profit margins remain "lower than their peers" and improvements are "going to be slow" as operating costs rise in tandem with improving sales, the analyst said.

Canada's ninth-biggest fund company yesterday reported a fourth-quarter profit drop of 25 per cent from a year earlier, when the company recorded a gain on the sale of a subsidiary. Profit in the three months ended Nov. 30 was $21-million or 23 cents a share, compared with $28-million or 13 cents in the same period a year earlier. Fourth-quarter revenue rose to $187.5-million from $148.6-million. In October, 2005, AGF reported a $15.6-million gain on the sale of its administrative services unit.

For the 12-month period ended Nov. 30, the company reported a profit of $112.7-million or $1.14 a share on revenue of $703.5-million, compared with a profit of $91.8-million or 80 cents on revenue of $594.4-million in 2005.

Mutual fund sales show the depth of AGF's improvement. In fiscal 2006, the company reported net fund sales of $437-million, up from net redemptions of $2.7-billion in 2005. Today, 28 of the company's 52 funds are reporting net monthly sales, up from only five funds reporting positive sales in 2005, said Randy Ambrosie, president of AGF Funds Inc., in a conference call yesterday.

But the turnaround has been costly. Expenses climbed to $452.5-million last year, up 29.4 per cent from $349.6-million in 2005. The company's earnings before interest, taxes, depreciation and amortization (EBITDA) margin on investment management operations fell to 39.2 per cent in fiscal 2006, down from 45.1 per cent in 2005. In comparison, fund rival CI Financial Income Fund boasts an industry-best EBITDA margin of about 50 per cent, analysts said.

"In order to drive growth in assets, we incurred higher general, and administrative expenses. AGF transformed itself into a growth company in 2006 by investing heavily in our business," Blake Goldring, AGF chairman and chief executive officer, told analysts.

Greg Henderson, AGF's chief financial officer, said the company has reached "the bottom" of margin erosion. Sales targets have been raised and margins will bounce back above 40 per cent in fiscal 2007, he said.

John Aiken of Dundee Securities was pleased to hear AGF take a "much more aggressive" outlook on margins.

"Sales levels have been strong . . . but to date we haven't seen evidence of it affecting the bottom line," Mr. Aiken said. "There is a sense from management that this will happen."

A recent shift in fund management duties is expected to aid the company's earnings statement.

In September, AGF severed its ties with Harris Associates LP, manager of the $3.2-billion AGF International Value Fund. The U.S. firm was replaced by AGF International Advisors Co. Ltd., AGF's own Ireland-based team. Internalizing costs and Ireland's lower corporate tax rate will benefit AGF going forward.

On the Toronto Stock Exchange yesterday, AGF's class B shares were up 50 cents to $27.50. Improved operating results have helped the stock rally from a June low of $19.10 to a December high of $28.

© 2007 The Globe and Mail. All rights reserved.

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