Stock Pick: CI Financial Corp. (CIX) shareholders should brace for a bumpy ride

Sale uncertainty is adding to the price hit

Chart showing trailing 12-month stock performance for CI Financial Inc.

On May 15, Scotiabank stunned Canada’s investment community by announcing that it wants to unload its 37% stake in CI Financial Corp. (TSX: CIX), one of Canada’s largest mutual fund firms. It purchased its shares in the company from Sun Life Financial in 2008 for $2.3 billion—it’s now worth $3.8 billion.

CI Financial’s investors are likely wondering what this possible sale means for them. Unfortunately, it’s not good news. Stephen Boland, an analyst at GMP Securities, thinks it’s “very negative” for the company. CI’s stock price had included at least one EBITDA multiple point as a takeover premium, he wrote in a May 15 report, and now that will disappear.

He had also though that CI would gain access to Scotia’s wealth management platforms, which would have increased the firm’s assets under management. That’s obviously, no longer on the table.

In the near-term, it’s unclear who will by Scotia’s shares. Will it be one company or will they sell their stake on the open market? The stock price won’t move any higher until that’s decided.

“We believe this announcement will also create an overhang on the stock since no timing was given on the potential transaction. We believe the whole block will need to trade at one time to eliminate the overhang,” he wrote.

If all of that wasn’t bad enough, CI implied that it might cut its 10 cents a share dividend — it’s currently yielding 3.57% — to save cash in the event that it wants to buy back its own stock. “Without the high dividend yield, this may create further pressure on the stock price,” wrote Boland.

Scott Chan, an analyst at Canaccord Genuity, downgraded CI from a buy to a hold on May 15 and said he was surprised by the news. In fact, he thought that Scotia would end up buying the rest of CI’s shares in the future. He too points out that CI is trading at a premium and until a sale gets sorted out the stock price will be under tremendous pressure.

He can see a scenario where CI buys back its own shares, but to do that it will have to use up its short-term investment balance of $95 million and its undrawn credit facility of $250. That would only get them about 9% of Scotia’s stake. They’d have to then find a way — possibly through debt — to purchase the remaining shares.

Investors should be prepared for a bumpy ride until this gets sorted out. The stock, which is currently trading around $33.50, is down about 7.3% since May 14. Chan has a $34.50 12-month price target.

Geoffrey Kwan, an analyst with RBC Capital Markets, is more bullish on the stock. He has a 12-month target of $40 and still sees company revenues increasing from $1.9 billion in 2014 to $2.14 billion in 2015, but he too thinks the stock could fall in the near-term.