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Bulls target AGF despite huge runup

The stock has racked up a 75% one-year return, but the industry's summer doldrums could present buying opportunity

AGF Management Ltd. shares have been on a tear over the past year, helped by rising stock markets and buoyant sales of mutual funds during the key registered retirement savings plan season.

The Toronto-based fund company's class B shares, which have racked up a one-year, 75-per-cent return, including dividends, closed down 55 cents at $36.30 Friday on the Toronto Stock Exchange, and are off from a 52-week high of $40 in April.

While some analysts are cautious about AGF stock, given its robust gains, other analysts are still bullish. "It's a good time to buy now," said CIBC World Markets Inc. analyst Stephen Boland. "You buy it through the summer months when the industry really slows down. ... and there is not so much momentum in terms of net sales." Fund company stocks tend to "rally quite strongly" during RRSP season before falling off a bit in March and April, he explained. "The selling point is over now."

Mr. Boland, who rates AGF a "sector outperformer" with a 12-month stock-price target of $39, is upbeat on AGF because it "is one of the leading sellers of funds right now," driven by strong sales of international funds, and its Elements fund-of-funds offerings.

With $30.2-billion in assets at the end of April, AGF is Canada's ninth-largest fund company. It brought in net sales of $252-million last month in its long-term funds (excludes short-term money market funds), the second highest for the month of April in the company's history.

Mr. Boland said he's also encouraged by improved profitability at the investment management operations of AGF, which also operates a trust company. AGF is getting "a margin pickup, which is really driving its EBITDA [earnings before interest, taxes, depreciation and amortization] quicker than its rivals."

Scotia Capital Inc. analyst Kevin Choquette also rates AGF a "sector outperformer," but with a higher 12-month stock price target of $45. That reflects high asset growth, strong sales momentum and expected margin improvement, he wrote in a report.

Financial results for AGF's fiscal first-quarter ended Feb. 28 beat analysts' expectations. Profit jumped 51 per cent from the year-earlier period to $36.3-million or 42 cents a diluted share. During a conference call after announcing the results, chief executive officer Blake Goldring bragged that AGF can compete against the big banks without having to own financial planning or brokerage firms to help sales.

"The mutual fund business is a great business, owning distribution is not essential, and an independent firm can compete with anyone," he told analysts.

Other rivals such as Winnipeg-based IGM Financial Inc., which owns Investors Group Inc. and Mackenzie Financial Corp., and Toronto-based CI Financial Income Fund, which owns CI Investments Inc., have distribution arms - brokers who sell the funds.

BMO Nesbitt Burns Inc. analyst John Reucassel rates AGF a "market perform," and has a 12-month stock price target of $38.66. He predicts fund flows are likely to remain attractive for the rest of 2007.

AGF did not disclose the price for which it sold its financial software provider unit, Investmaster Group Ltd. - which Mr. Reucassel estimated at less than $10-million - but it continues a plan to focus on wealth management, he wrote in a recent report.

He expects AGF will also sell part or all of its ownership in British-based money manager Smith & Williamson Holdings Ltd. via an initial public offering or sale. "While it is difficult to determine the returns to shareholders generated by these investments, we are comfortable with the company's renewed focus on its core Canadian investment management operations."

© 2007 The Globe and Mail. All rights reserved.

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