Alternative Investments Like Kensington Capital May Impact Future Earnings Despite Revenue Challenges

Key Takeaways

• AGF Management's strategic focus on high-growth areas like mutual funds, ETFs, and SMAs could drive revenue and enhance earnings potential.
  
• Their strategic acquisitions and partnerships in high-margin sectors aim to diversify revenue streams and capitalize on alternative investment demand.
  
• AGF's growth in alternative investment strategies and assets under management is notable, but economic pressures and integration risks could impact future earnings and margins.

Catalysts

AGF Management Limited is one of Canada’s premier investment management companies with offices across Canada and subsidiaries around the world.

• AGF Management is experiencing significant AUM growth, particularly in mutual funds, ETFs, and SMAs, indicating potential for increased revenue as these segments outperform industry averages with 73% year-over-year growth in ETFs and SMAs.
  
• The firm has a strong financial position with a healthy balance of cash and credit availability, allowing flexibility in capital allocation, aiming to drive revenue growth through strategic investments and acquisitions in high-growth areas.
  
• AGF’s integration of alternative investment strategies, such as the launch of New Holland Capital's Tactical Alpha Fund and partnerships in private equity and private credit, positions the company to benefit from growing demand in these high-margin sectors, potentially uplifting earnings.
  
• Their combination of private wealth AUM growth and strategic acquisitions, like the 51% stake in Kensington Capital Partners, enhances the diversification and robustness of their revenue streams.
  
• AGF plans to maintain sales momentum and penetrate high-growth distribution channels, which could sustainably enhance net margins and boost future earnings.

AGF Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AGF Management's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.8% today to 14.1% in 3 years time.
• Analysts expect earnings to reach CA$75.5 million (and earnings per share of CA$1.19) by about March 2028, down from CA$97.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from 6.6x today. This future PE is greater than the current PE for the CA Capital Markets industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

AGF Management Future Earnings Per Share Growth

Risks

• Interest rate volatility and high consumer prices previously dampened investor sentiment, which could continue to pose a risk to revenue growth if such economic pressures persist or reemerge.
  
• Significant growth in AUM (assets under management) and fee-earning assets is outpacing industry standards, but a downturn in investment performance or economic conditions could negatively impact future revenue and AUM levels.
  
• The company's adjusted SG&A costs exceeded guidance, driven by higher performance-based compensation, indicating a risk of increased operational expenses which could suppress net margins if not managed effectively.
  
• The recent acquisitions and integration of alternative investment partners such as Kensington Capital Partners and New Holland Capital bring the risk of integration challenges and could affect earnings if these investments do not perform as expected.
  
• AGF’s growing reliance on alternative investment strategies and revenues from such investments involve potential cyclical or market-specific risks, which might lead to volatile earnings if these sectors encounter unforeseen disruptions or downturns.

Valuation

• The analysts have a consensus price target of CA$13.214 for AGF Management based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$17.0, and the most bearish reporting a price target of just CA$11.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$536.2 million, earnings will come to CA$75.5 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of CA$9.8, the analyst price target of CA$13.21 is 25.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.