Integrated Asset Management (IAM.TO) is a company that resembles Argo Group in many ways. It’s also a small asset management company, it is a net-net with more cash and cash equivalents than it’s market cap, it is profitable and paying a big dividend (current yield is 8.5%). Some key statistics from Yahoo Finance:
Last Price: CA$0.59
Shares outstanding: 28.31M
Market Cap: 16.70M
Trailing P/E (ttm): 3.27
Price/Book (mrq): 0.86
IAM.TO focuses on alternative investments such as real estate, managed futures and private equity, and services both institutional investors and retail investors. Two weeks ago the company announced that a major client (good for 8% of revenue and 15% of AUM) would terminate his account, so we do have to keep this in mind when looking at the financials. The latest annual report is easily readable and contains graphs with financial data for the past 10 years for key statistics such as AUM, revenues, EPS, cash flow and dividends. Wish this would be standard!
ValuationThe company last reported for the period ending 30 September 2011, and at that date it had no debt, 8.2M in cash and 11.7M in investments in funds managed by the company versus a market cap of 16.7M. It would not be totally fair to value the company based on it’s current assets plus the value of the business itself, since a decent amount of money is used in business activities such as providing seed capital for new funds. The company could probably return most of this cash to share holders, but it would hurt the business to some degree. But when the market values the business at a negative number it’s not that important to be very precise (EV is minus 3M).
Average EPS over the past 10 years have been 0.042 (latest year: 0.15) and average cash flow per share has been 0.128 (latest year 0.14). If you would throw an 8.5x no growth multiplier on those averages you would get a per share business value between 0.357 and 1.088. Add the cash and equivalents (0.70/share) and we get a target share price between 1.06 and 1.79 while the current share price is just 0.59. One reason for the big difference between EPS and cash flow is that the company wrote down a significant amount of goodwill in 2009 related to the acquisition of BluMont Capital (the retail alternative investments business of Integrated Asset Management).
These numbers are a very rough estimation of value, but the low end of the valuation is probably on the pessimistic side. AUM have grown significantly the past 10 years and are - after accounting for the loss of the big client - still higher than the 10 year average. The company also has large unrealized performance fees and tax assets related to the BluMont Capital acquisition. On the other hand: assets management companies might be facing increased pressure to reduce fees, undermining profitability as this column at Bloomberg from Alice Schroeder argues.
InsidersThe majority of the company is owned by insiders. Employees control more than 60% of the outstanding shares, with the CEO controlling 38.3% (most shares are held in a corporation that also has the CFO and a director as share holders). The CIO of the company owns another 17.2%. I would prefer insiders to own a little bit less, but having insiders own too much is better than them owning too little. In the previous year there has been a little bit of insider buying, but nothing significant. The number of common shares outstanding has remained almost constant the past years, but there are 2.57M options outstanding with strikes between 0.70 and CA$1.50.
ConclusionMr. Market seems to be very negative towards asset management companies and financial companies in general, and while there are some good reasons to not be overly optimistic (or even neutral) it also seems overly pessimistic to value a company with a long history of profitability below the market value of the cash and securities it owns. It should at least be worth something!
I have been discussing, and buying a decent amount financial companies in the past months and that is potentially becoming a bit problematic. Having a portfolio that is highly concentrated and correlated is asking for trouble. My position in ARGO.L is on the small side though since it hard to buy due to the limited liquidity, so I do have some room to add IAM.TO to the portfolio as well. In general I try to scale my position size in relation to the ranking I give the stock, but portfolio diversification is more important to me so I will keep the combined position size of ARGO.L and IAM.TO in check.
On a scale from 1 to 10 I give the stock a 8.5: the company has a strong balance sheet, is profitable, has a lot of insider ownership and a high dividend yield. I don’t like the expensive acquisition in the past, and the lack of insider buying or share buy backs.