11 September 2007

BMO Represents ~42% of Guardian Capital's NAV

The Globe and Mail, Shirley Won, 11 September 2007

Whither Bank of Montreal stock, so goes shares of Guardian Capital Group Ltd.

Shares of the money manager have been tracking the bank's stock because it has close to five million BMO shares on its books - a holding that represents nearly half of its net asset value (NAV).

And some investment industry folks suggest it could be a less pricey way to play BMO, whose shares yesterday closed at $62.34 on the Toronto Stock Exchange.

Guardian non-voting A shares, which are off its 52-week high of $13.50 in May and have taken a hit recently like other financial service stocks, ended the day $10.82.

"It's a good proxy for BMO," says Jeannine LiChong, a portfolio manager with Gluskin Sheff + Associates Inc.

But Gluskin Sheff - the largest institutional shareholder of Guardian's A shares - owns the stock because it is trading at a substantial discount to an estimated net asset value of about $15 a share, Ms. LiChong said.

Guardian runs institutional money, and also owns a mutual fund dealer.

"If you look at the market value of what they hold in investments, including BMO, that is where the stock is trading at," she said. "Basically, you are getting the investment management and financial advisory business for free."

Toronto-based Guardian acquired its BMO shares in a $180-million stock deal ($36.29 a share) from selling its mutual fund business known as Guardian Group of Funds to the bank.

"Obviously, there would be a tax liability if they were to sell [the shares] so you would have to give some kind of estimate for that as well," Ms. LiChong said in an interview.

Guardian is controlled by its chief executive officer John Christodoulou, who is in his mid-70s. In 2001, BMO began negotiating a deal to buy all of Guardian, but only ended up buying the mutual fund arm. Guardian, however, negotiated a contract to continue running certain funds.

While Guardian has earned a strong reputation for investing in the income trust sector, that avenue of growth has looked less robust after Ottawa announced plans last fall to tax these investments in 2011.

But Ms. LiChong is not concerned, saying the trust sector has been rebounding, and Guardian has been able to manage its way through this unexpected turn of events.

Scotia Capital Inc. analyst Kevin Choquette has a "sector perform" rating on Guardian stock with a one-year target of $14.

BMO represents about 42 per cent of Guardian's net asset value, while its institutional asset business is about 33 per cent, Mr. Choquette wrote in a recent report.

"We view Guardian Capital as a high-quality small-cap financial with steady earnings improvement and relatively high discount to NAV" of about $16, the analyst said.

Guardian's NAV and profit should get a lift from "the bank's expected share price appreciation and dividend increases," Mr. Choquette added.

Both BMO and Guardian's shares prices have "moved hand-in-hand" since Guardian sold its fund arm to the bank, and "a 10 per cent increase in BMO's share price increases Guardian's NAV by approximately 5 per cent," he said

Robert Tattersall, executive vice-president of Howson Tattersall Investment Counsel Ltd., said he has owned Guardian stock for a number of years, and paid an average of $7.50 a share.

"It's one of those stocks that you can think of as having a hidden asset in plain view," said Mr. Tattersall, referring to the BMO holding.

Subtracting the value for BMO, "we are buying an institutional or money management firm with a diverse book of business for a modest valuation," said Mr. Tattersall, a value investor who holds Guardian in Saxon Small Cap and other funds.

Speculation as to whether Guardian will one day transfer BMO stock to its shareholders, and any takeover potential for the company is dependent on Mr. Christodoulou, who controls about half the voting shares. There has long been speculation that he could sell for succession reasons.

But Mr. Tattersall suggested that Mr. Christodoulou is well paid, and appears to be "in no hurry to move on." Last year, the CEO received 85 per cent of the stock options granted by Guardian - that is, 400,000 class A shares - in addition to his pay package of $1.3-million, including a bonus of $700,000.

"We don't control the agenda, and that is one reason why it [Guardian stock] is moderately undervalued," Mr. Tattersall said. "I cannot say it is a screaming buy because the [non-voting A] shareholders are not driving the bus."

By the numbers

Assets under management

at June 30: $17.8-billion.

Major shareholders: John Christodoulou with 49 per cent of voting shares; Joseph Rotman, founder of Clairvest Inc., with 16 per cent; and Rosemary Short, wife of Guardian's founder Norman Short, with 12 per cent.

Largest shareholder of non-voting A shares: Gluskin Sheff + Associates with 10 per cent.

Advisers at Guardian unit, Worldsource Wealth Management: 600

Market value: $431-million