Quick Thoughts on AGF Management Limited AGF.B Q4 Earnings
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Disclaimer: I am long shares of AGF.B at the time of publishing this post.
Hey Continuous Compounders, here are my super quick thoughts on AGF.B Q4 earnings update.
If you aren’t up to speed on AGF.B here are my previous stock pitches:
Initial stock pitch: AGF.B Quick Pitch (Q3)
Additional AGF.B analysis: AGF.B part 2
-Based on the stock price of $11.20/per share (CAD), the stock now trades at:
$750 mm mcap, $58 mm Net Cash (incl. ST investments), and $693 mm EV
Including $321 mm of LT investments, EV is 372 mm EV
0.65x P/B
LTM EV multiples (excl. LT Investments): 5.3x EV/EBIT, 5.1x EV/EBITDA, 7.0x EV/FCFF
LTM EV multiples (incl. LT Investments): 2.8x EV/EBIT, 2.7x EV/EBITDA, 3.7x EV/FCFF
LTM P/E 7.8x, 4.1% div yield
-AUM has once again risen to $53.6 bn. This was not surprising to me as the market has continued to climb. If you followed AGF’s monthly AUM reporting, you’d notice that AUM has continued to climb every single month. More AUM equals more fees, good.
-What is worthy to note is that AUM grew in every single sub-category, most notably in the Mutual Fund business. The mutual fund business is one of the most lucrative segments, hence this being the largest contributor to AUM growth is good.
-For Q4, net sales remain marginally positive at +5mm, still indicating breakeven efforts in counteracting redemptions. Not bad, but not great.
-Acquiring a majority 51% interest in Kensington Capital Partners Limited (KCPL) in March 2024 is a mixed bag for me personally. Likely not doing too bad given the 51% was acquired early in 2024, where the market continued to increase from this point. Historically, the company has been bad acquirers.
-However, mgmt has changed up their acquisition strategy in the 2020s compared to in the 2000s and 2010s. They are buying small stakes with the optionality for increased equity stake. I prefer this over the more aggressive approach in former years.
-Overall, the asset management business is a hard business with lots of fee pressure. Acquiring other asset mgmt firms in the same industry that are also struggling likely doesn’t grow the ship all that much. And how can you truly discern a good acquisition target from one that had a lucky few years?
-The saving grace is that clients who remain sticky or who would like financial advice from a financial advisor are providing AGF with high margins.
-Investing in AGF is essentially taking a view on the direction of the market. I suspect the stock will continue to climb if its AUM continues to grow with the market. Not saying what the future holds, but if your view is that the market is likely to decline, then in such a climate, redemptions could exceed net sales. The counterpoint to this is that in a declining market, AGF tends to outperform its peers in terms of performance.
-The bear view is that its great that AUM is growing and all, but if the market tanks, then you could be in a state of a double whammy. AUM declines and redemptions exceed gross sales. What would lead bears to change their mind on AGF is if they are able to prove that they can grow their business without relying on “market appreciation of funds.” The bear view isn’t completely without reason, if we are being honest, AGF has no competitive moat in regards to investment prowess. Given they state they outperform their peers slightly on a 3 to 5 year time horizon, I’ll give them some props, but we don’t have a bunch of Buffetts at the helm of these funds; we have a group of people being paid very well and are incentivized to invest in a manner that doesn’t get them fired. You risk significantly underperforming by trying to significantly outperform.
-The bull view is that AUM growth from gross sales, “market appreciation of funds,” and acquisitions can more than counteract redemptions. The stock is trading too cheaply for the recent positive developments to not be reflected in its stock price, hence the recent 25% upside.
I think there are 3 scenarios:
Gross sales exceed redemptions and spread widens (massive upside)
Gross sales = redemptions (upside)
Redemptions > Gross sales with gross sales declining yoy (downside)
Scenario 1 is unlikely given I see no strong competitive advantage in any part of their operation. I think if AGF can prove AGF is a scenario 2 kind of company, where gross sales simply balance out redemptions, and we have market appreciation of funds and acquisitions driving growth, this alone could drive the stock up another 50%.
-The extra upside comes from productive use of excess cash and prudent returns from long-term investments.
-What happens in a down market? Will redemption suddenly accelerate and significantly outpace gross sales? A lot of pessimism is likely coming from scenario 3.
-What was AGF’s stated mutual fund gross returns percentile performance? (AGF definition of percentile is the lower the better)
1 year avg percentile of 48% (52% percentile)
3 year avg percentile of 41% (59% percentile)
The above indicates that AGF has outperformed their peers in 2024.
-So how should we profit off AGF? I believe stock participants will fluctuate from being scenario 2 or 3 depending on gross sales and redemptions performance. I expect the stock to trade down in quarters where net redemptions are significant, creating a buying opportunity where full pessimism is factored in. Then one should go long to profit from sentiment going from bad to not-so-bad and maybe to good. I don’t believe there is much chance of great, but we have the optionality for that.
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thanks for the timely update, sir.