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DundeeWealth steps into spotlight

Wealth management firm's expansion strategy and Sprott IPO have analysts paying attention

FUNDS REPORTER

It's show-me time these days at DundeeWealth Inc.

Shares of the wealth management company lost altitude when it took itself off the auction block four months ago.

The loss of a potential takeover deal upset investors who knocked the stock from its $22 perch. It rose 9 cents to $13.80 yesterday on the Toronto Stock Exchange.

Now, it's up to DundeeWealth's chief executive officer David Goodman, whose family controls the company, to show he can deliver the growth needed to boost its languishing stock.

Shares of DundeeWealth, which owns Dynamic Mutual Funds, are gaining attention because of its expansion strategy that includes this week's acquisition of a key stake in pension fund manager Aurion Capital Management Inc.

And the imminent $10-a-share initial public offering by Sprott Asset Management Inc. is causing analysts to take a harder look at DundeeWealth.

Like Sprott's mutual funds, which can generate performance fees on top of management fees, the Dynamic funds have 25 per cent of their assets tied to this kind of lucrative pricing linked to beating benchmarks. They apply mainly to the Power funds run by star managers like Rohit Sehgal and Noah Blackstein.

"The Sprott IPO is bringing more attention to these types of assets," said Genuity Capital Markets analyst Gabriel Dechaine. "And from my perspective, DundeeWealth's performance-generating assets are being undervalued."

The Sprott IPO was the "catalyst" for the analyst's decision to upgrade his rating on DundeeWealth recently to a "buy" with a one-year target of $16. "Embedded in DundeeWealth is a performance-fee manager running $7-billion of assets," Mr. Dechaine said.

On a consolidated basis, DundeeWealth trades at an enterprise value to assets under administration of less than 7 per cent, which he does not believe attributes sufficient value to the company's performance-fee assets.

Factors that will drive the stock include the momentum from its Dynamic funds, whose assets have been growing at a faster rate than most of their Canadian peers over the past several years, and its strong distribution arm, he said.

"Their funds have had very strong performance," he added. "It's a lot easier for an adviser to pitch a Dynamic fund when the performance is there to back it up."

Toronto-based DundeeWealth pulled itself off the block following a 16-week auction triggered by an informal unsolicited bid by CI Financial Income Fund. The bid came last fall when DundeeWealth was selling its money-losing Dundee Bank unit for $260-million to Bank of Nova Scotia. The bailout by Scotiabank required DundeeWealth to sell an 18-per-cent stake to the bank for $348-million.

The deal happened after DundeeWealth ran into problems from holding troubled asset-backed commercial paper with a par value at maturity of $379-million. It has written down $96-million.

"I wouldn't be surprised if there are further charges ... but I think the market generally is factoring in this risk," Mr. Dechaine said.

The "silver lining" in the transaction with Scotiabank was that it shifted the focus of DundeeWealth back to "high valuation and high strategic value components of the business - namely, the investment management and distribution operations," Mr. Dechaine said. DundeeWealth might strike a deal with Scotiabank to sell more Dynamic funds through its branch network, he added.

Mr. Dechaine expects DundeeWealth, which pays a lower dividend yield than competitors, to increase its annual payout because it will no longer need to divert its free cash flow to initiatives like Dundee Bank as it has done in the past.

Mr. Goodman, CEO of DundeeWealth, told reporters in March that the company is on the acquisition trail. It bought a 60-per-cent stake in Aurion, but no price was disclosed.

"The acquisition of Aurion supports our thesis that DundeeWealth will continue to grow for several years," said Thomas Weisel Partners analyst Horst Hueniken.

Mr. Hueniken, who has an "overweight" rating on DundeeWealth with a target of $15.50, said in a report that DundeeWealth will increase its institutional business to $8.4-billion, or 25 per cent of assets under management, from $3.9-billion or 13.6 per cent.

By the numbers

$29-billion

Assets under management

19

Price-to-earnings ratio0.6%

Dividend yield

$2-billion

Market capitalization

52-week stock price range

$11.14 to $22.31Main shareholder

Dundee Corp., controlled by Toronto's Goodman family, with a 62.8-per-cent stake

© 2007 The Globe and Mail. All rights reserved.

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