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With fund business on a roll, investors returning to Dundee

Analysts covering wealth management firm give it a unanimous 'buy' rating


Shares of DundeeWealth Inc. have rebounded sharply over the past year amid a stock market recovery and strong flows into its mutual fund family.

Analysts are more upbeat on the stock of the wealth management firm, saying its fund arm has the best sales momentum among the independent firms and will benefit from earlier cost-cutting and a stronger balance sheet.

DundeeWealth's better-than-expected fourth-quarter results and its move to double its quarterly dividend to 7 cents a share last week has sparked more optimism among analysts who upgraded their rating or target for the stock.

According to Bloomberg, there is a chorus of "buy" ratings from the five analysts covering the firm, and whose one-year targets range from $17 to $20 a share. The stock closed Friday at $14.78 on the Toronto Stock Exchange.

The Toronto-based company's investment arm sells mutual and hedge funds under the Dynamic brand name. It also owns a financial planning unit with 1,100 advisers and the Dundee Securities Corp. brokerage firm.

Genuity Capital Markets analyst Gabriel Dechaine upgraded his rating on DundeeWealth to a "buy" from a "hold," and boosted his one-year target to $17 a share from $15. "We believe factors contributing to DundeeWealth's growth are sustainable," the analyst said.

The firm's "superior net sales" of mutual funds stem not only from strong performance and effective product development, but because it also owns an adviser network to promote its offerings, he suggested in a report.

The proportion of its funds included in the mutual fund assets under management in its own distribution network rose to 31 per cent by the end of 2009 from 25 per cent a year earlier, Mr. Dechaine wrote in a report.

"This progress highlights the strategic importance of owing distribution, as well as management's ability to exploit a proprietary sales channel."

DundeeWealth reported profit from continuing operations of $11.2-million or 7 cents a fully diluted share for the fourth quarter ended Dec. 31. That compares with a loss of $126.3-million or 89 cents for the same period a year earlier.

The strong performance of the quarter is the fruit of a turnaround plan executed over the last two years by chief executive officer David Goodman. He embarked on a renewed growth strategy after DundeeWealth took itself off the auction block following an informal, unsolicited bid by CI Financial Corp.

The offer came when DundeeWealth was forced to sell its money-losing bank unit to Bank of Nova Scotia (which in turn got an equity stake in DundeeWealth) after it ran into problems from holding troubled asset-backed commercial paper (ABCP).

"DundeeWealth has shed a significant portion of its costs base [including a 25-per-cent reduction in head count], reshaped and refocused its advisory operations, sold the majority of the floating rate notes that it received from the ABCP settlement and revamped its capital markets operations," noted Jeff Fenwick, analyst at Cormark Securities Inc.

"We believe 2010 will be another year of strong earnings performance as the top line continues to expand while costs remain under control," said the analyst who raised his target to $18.25 a share from $17.

The company has also finished the latest quarter with over $400-million in cash from raising debt, and the sale of floating rate notes. "The balance sheet is the strongest it has been in years," said GMP Securities analyst Stephen Boland, who raised his target to $20 a share from $18.50.

During last week's conference call, Mr. Goodman said that management is looking to spend the cash on tuck-in acquisitions - similar to the acquisition of Aurion Capital Management Inc. - or to expand its investment arm.

Mr. Boland said the only other use of the cash that he could envision for DundeeWealth - other than a major acquisition - would be to partner with parent firm Dundee Corp. to buy back its equity stake from Scotiabank.

Because there has been little in the way of a closer operational partnership between two parties, "this may be an opportune time to retrieve this ownership stake if the partnership outlook is dim," the analyst said. "The total cost would be approximately $380-million."


By the numbers

Major shareholders: Dundee Corp., controlled by the Goodman family, owns 47 per cent, while Bank of Nova Scotia owns 19 per cent.

Assets under management: $36.1-billion at Dec. 31

Assets under administration:

$25.5-billion at Dec. 31

52-week range for stock: $4.81 to $15.10

Market capitalization: $2.18-billion

Price-to-earnings ratio: 42.23

Dividend yield: 1.90

© 2007 The Globe and Mail. All rights reserved.

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