Guardian Capital

We’d like to thank our friend, Dr. Ryan Males, from CIBC Capital Markets for the following note on Guardian Capital. As one of the Vertex Fund and Vertex Growth Fund‘s largest holdings, we thought it was worth sharing with you.

I have an affinity for one particular small-cap company – Guardian Capital (GCG/A CN).  When I first met their President & CEO, George Mavroudis, in 2013 my conclusions about this business were as follows:

At its core, this is the story of an over-capitalized company that is patiently working on building out profitable business lines.  While some might look at the smaller cap, illiquid company, and wonder why they don’t just liquidate the BMO shares and sell the asset management business to one of the many banks who want to grow in that space, I really don’t think that’s likely to happen.  GCG is an investment manager and they believe that they can generate more value for shareholders by growing the business and patiently converting capital into recurring profits.

In reading through their Q1 disclosure, you will find evidence of this converting-capital-into-recurring-profits theme.  Guardian sold 342k of their 4.5M Bank of Montreal (BMO CN) shares in the quarter for about $26M in proceeds, then used those proceeds to support one of their global expansion projects, UK investment manager, GuardCap.  It is common for Guardian to inject early capital into their new funds, and this time they put the $26M from the BMO sale into GuardCap’s Fundamental Global Equity UCITS fund.  The AUM on that fund is now > $100M and Guardian says marketing efforts (which I’m sure are helped by an investment by the parent company) are “starting to materialize into client assets“.

Guardian also continued to invest in their own business another way…by buying back their shares.  The X-Factor company (i.e. shares in decline, dividends on the rise) bought back 472k of their own shares for $8.3M.  They also paid out $2.2M as dividends.

Guardian Chart

Source: Bloomberg

When I first started looking into the Guardian story, they had 32.6M shares outstanding. Since then, they have bought back just over 5% of their shares and my math says they should keep buying them back because, in my opinion, the shares are still very cheap.  Consider:

GCG/A shares outstanding 30.9M
Share price $19/share
Market capitalization $586M
Cash & interest-bearing deposits (from balance sheet) $171
Bank loans & borrowings (from balance sheet) $65M
Enterprise value $480M
# of BMO shares (from FS notes) 4.2M
Price of BMO shares $82/share
Value of BMO shares $344M
Deferred tax liability (from balance sheet) $45M
Value of BMO shares, net of tax liability $299M
Value of other securities held (from FS notes) $204M
Enterprise value, net of BMO shares and other securities -$23M

An implied negative value for their profitable asset management and financial advisory business MAKES NO SENSE:

  As of 3/31/16
AUM at March 31 (from MD&A) $24.8B
Investment management EBIT (ttm, from FS notes) $18.9M
AUA at March 31 (from MD&A) $15.0B
Financial advisory EBIT (ttm, from FS notes) $10.2M
EBIT (ttm) of underlying investment & advisory business $29.1M

If you think my math is flawed, I’d love to be shown where my error is.  If it’s not, I’d love for you to show me another company managing $25B in AUM and a further $15B in AUA that generated about $29M in annual EBIT and has a negative EV.

At a 10x EBIT multiple, there’s upwards of $10/share of unlocked value in Guardian just based on a static view of the company today.  Over the long-run, it could get even better.  If you run a small-cap portfolio and can look past competing with the company itself for limited liquidity, this is a stock you have to consider.

Until next time…