CI Financial Earnings: Outside Investment and Debt Deleveraging Outweigh Operating Results

While there was little in narrow-moat CI Financial's first-quarter operating results that would alter our long-term view of the firm, we expect to increase our fair value estimate at least 10% to account for the impact that outside investment and subsequent debt deleveraging will have on our valuation. Asset managers like CI Financial have a high degree of revenue cyclicality and operating leverage, with results tending to be affected by the vagaries of the equity and credit markets. As such, they should not maintain more than low to moderate levels of financial leverage. CI Financial's net debt load of more than CAD 4.0 billion at the end of the first quarter, most of which was issued to fund its acquisition spree of U.S.-based wealth managers the past several years, was equivalent to a net debt/adjusted EBIDTA ratio of 4.0 times. This was much higher than it should have been for an asset manager, in our view.