CA - Fiera Capital: Risk Profile Of The Asset Manager Yielding 12%

2023-05-22 01:30:59 ET

Summary

• Fiera's management continues to advocate its commitment to the company’s dividend, despite the payout ratio reaching concerning levels.
• Fiera’s AUM and EBITDA margins have been declining due to net redemptions over the past few quarters.
• There are some bright spots in the company’s business lines, including strong sales growth in Private Markets and Wealth Management.
• If the company can turn around its sales challenges, Fiera is cheaply valued at 6.4X adj. earnings.

Author's Note: All funds in Canadian currency unless otherwise noted.

Introduction

With $164.7B in assets under management "AUM", Fiera Capital ( FSZ:CA ) ( FRRPF ) is Canada's 3rd largest asset manager and one of top 150 managers globally by AUM. Fiera provides public and private investment funds in a variety of asset classes including, fixed income, equity, infrastructure, agriculture and real estate to institutional, financial intermediary and high net worth wealth clients in North America, Europe and Asia.

On balance, Fiera's redemptions have exceeded sales for the past eight consecutive quarters, and 11 of the last 13 quarters. Since I last covered Fiera in February 2023, the company's shares have declined 16% for a one-year loss of almost 24%. This poor performance has stretched the company's dividend yield to over 12% and its payout ratio to concerning levels. While there are bright spots in the company's performance, the trend has been discouraging. Should Fiera be able to find sales traction, it would offer a strong total return opportunity as a turnaround story with a high yield.

Challenging Q1 2023 Results

Fiera reported adjusted net earnings of $23.5M, 29.4% decrease from to Q1 2022, driven by lower EBITDA and higher interest expense. Fiera's Q1 2023 results extended negative sentiment with a trend of net redemptions perforated by a few positive developments in selected growth areas. For Q1 2023, Fiera saw net redemptions of -$1.52B compared to net redemptions of -$502M in the first quarter of 2022. Specifically, these outflows were centred on the company's Financial Intermediaries segment, where net redemptions reached -$2.28B as a result of a significant redemption in one of Fiera's Global and International Equity funds. Private Wealth net redemptions were -$230M, while Fiera's Institutional line saw net sales of +$942M. With the impact of the quarter of accounted for, Fiera reported assets under management of $164B, a decline of 5.7% from $174B one year earlier.

One of the impacts of these net redemptions has been to change Fiera's portfolio composition by distribution type. Two years ago, the portion of AUM held by financial intermediaries was over 40%, as of Q1 2023, this has dropped to approximately 37% with Institutional investors and Private Wealth investors segments, taking on more importance.

This bleeding of AUM negatively impacted revenue by 8.8% and EBITDA by 18% compared to Q1 2022. Q1 2023 adjusted EBITDA margin was 24.7% vs. 28.6% Q/Q and vs. 27.5% Q1 2022. This 389 basis point decline from the previous quarter is a concern that is compounded by net redemptions. On the recent earnings call, Fiera noted that its EBITDA margin target is in the mid-30s.

Bright Spots

While still a small part of the overall portfolio, Private Market strategies have demonstrated impressive growth over the past few years. In addition to significant AUM growth rate averaging 19% annually since 2020, Private Market strategies command a higher average fee rate than other business lines. As at Q1 2023, Private Markets account for 30% of revenues while only representing 11% of AUM.

Similarly, Fiera's Wealth Management segment has been performing well, with revenues generated from Fiera Private Wealth growing at a compound annual rate of 9% over the past two years. These segments have been helped by the underlying performance of Fiera's funds relative to the market. For the first quarter of 2023, greater portions of Fiera's funds were ranked in the first or second quartile by performance.

International Distribution

As part of Fiera's response to shrinking AUM, the company has re-evaluated its regional distribution platform. One of the changes being made to support better distribution, is to appoint new regional CEOs for each of Fiera's key markets outside of Canada. These executives will be given the mandate to drive regional distribution and engage employees and investors with the Fiera Capital brand. Jean-Guy Desjardins, Fiera Chairman and Chief Executive Officer outlined the company's plans to add regional CEO's in each of Fiera's key markets outside of Canada:

I am pleased to announce that we are finalizing the recruitment of our new CEO for the EMEA region, which is Europe, Middle East and Africa regions, and will be based in London. And as well, we have confirmed the appointment of our new CEO for Fiera Asia, and the recruiting process for the CEO of the United States is well underway and should all be completed by September.

This local strategy supports the company's current strength in Wealth Management and Private Markets lines where local relationships are key to growing sales. It will be important to watch the geographic mix of AUM over the next few quarters to see if this strategy is successful in growing sales in Europe, Asia and the U.S.

Dividend Safety

At current levels, Fiera's $0.215 quarterly dividend per share offers a yield of 12%. The company's yield has only been higher than current levels during March of 2020 when the pandemic temporarily shook markets. For context, the average yield so far in 2023 has been 10.4% compared to 10 years ago in 2013 where the company had an average yield of less than 3%.

With the company's annual payout of $0.86, Fiera has reached a TTM payout ratio of nearly 80%. This is a substantial escalation from approximately 60% from Q3 2022. Over the past two quarters, TTM cash flow has not covered the TTM dividend. For Q1 2023, TTM cash flow was $68M compared to $88M in dividend payments. For Q1 2023, adjusted net earnings were $23.5M, while the dividend costs approximately $22M to support.

On the recent Q1 2023 earnings call, Chief Financial Officer Lucas Pontillo reiterated the company's commitment to its dividend.

We remain committed to delivering value to our shareholders as a fundamental pillar of our strategy. As such, we continue to return capital to our shareholders through our dividend. The board has declared a quarterly dividend of CAD0.215 per share, payable to holders of record on June 19, 2023.

Management went on to say that they expect " to be back in line by the end of this year, where the free cash flow will be aligned with the dividend ".

While the company's 12.2% yield may look tempting, it may not be sustainable should Fiera continue to face this magnitude of redemptions. For dividend growth investors, there is no chance of dividend increases in the near future. As I noted in my previous analysis of Fiera, even if the company can maintain its dividend by normalizing its free cash flow, it may still choose to reduce the dividend if it does not see that the market is recognizing the dividend as a preferred use of capital. Fiera has been modestly reducing its share count through its NCIB program. The company may consider buying back more shares at current levels.

Risk Analysis

Over the past two years ending March 2023, Fiera's leverage ratio (net debt, divided by last twelve months Adjusted EBITDA) has creeped up from 2.72X to 3.31X. While the company's leverage ratio is not alarming, the leverage trend has resulted in higher borrowing costs.

For the last quarter, Fiera's interest on long-term debt increased approximately $3M or 39% to approximately $10.5M. While Fiera holds approximately $88M in cash, total long-term debt increased 8.4% to $481M in Q1 2023. Net Debt has risen 21% to $608M in March 2023 from $501M in December 2021.

In addition to a balance sheet that has been under pressure, Fiera's business model has seen some industry headwinds that include fee compression and above average fund redemptions in 2022. In addition to the headline risks of continued net outflows, or a cut to the dividend, Fiera faces key personnel and client risks. As a relatively small company, individual fund managers and individual client investment decisions can have a significant impact on quarterly results. The loss of a key customer that leads to a large redemption could materially hurt EBITDA, as was the case with the unnamed large client that was sub-advised by StonePine in the most recent quarter.

Investor Takeaways

If Fiera can regain sales traction and capitalize on its growing Private Market and Wealth Management segments, shares might enjoy a nice rebound. At 6.3X adjusted earnings, and offering a 12% yield, Fiera is a cheap asset manager with an attractive dividend. While Management continues to defend the safety of the dividend, investors should be cautious when cash flow doesn't cover a dividend payment. Even before considering Fiera as a turnaround play, I would want to see a few quarters of positive net sales before initiating a position.

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