Sprott (TSX:SII) — the Toronto-based asset management firm — is set to debut on the New York Stock Exchange next week. Its stock is expected to start trading on NYSE from June 29, the company revealed on Wednesday. Sprott’s dual listing on NYSE and TSX might look like an interesting development at first. However, let’s take a closer look at the company’s recent financials and other developments and find out whether it’s worth investing.
Recent stock consolidation on TSX
Nearly a month ago (on May 26), Sprott announced the plan to consolidate its shares on TSX — which were trading at $3.67 at the time. With one-for-10 consolidation — also known as reverse stock split — its total outstanding common shares reduced from about 253.56 million to 25.36 million.
In general, a reverse stock split doesn’t have any major significance for businesses, except it reduces the number of outstanding shares and tends to boost a company’s per-share prices as multiple shares get combined into one.
In the first quarter, Sprott posted an adjusted EPS of $0.10 — without any change from its earnings in the same period of the previous year. The company also missed analysts’ EPS estimate of $0.23. It was the fifth consecutive quarter when its EPS fell short of analysts’ expectations. In the previous quarter, the company’s adjusted EPS dropped by 75% on a YoY (year-over-year) basis.
Other asset management companies such as CI Financial and IGM Financial reported a solid three-digit rise in their earnings in Q1.
In January, Sprott acquired Tocqueville Asset Management’s gold strategies, which boosted its assets under management by about US$1.7 billion. Despite a significant rise in its management fees and commissions, a considerable drop in its finance income and investment losses lowered Sprott’s revenue-growth rate in the first quarter. Also, its operating expenses rose by about 14% YoY to $18 million in the last quarter.
Recently, Sprott’s valuations have gone up sharply. It’s trading 26.2 times its EV/EBITDA and 53 times its earnings over the trailing 12 months. These valuation multiples — in my opinion — are way too high for a business with such performance.
By comparison, other asset management companies such as Fiera Capital and CI Financial have much lower valuation. Fiera Capital is trading 7.7 times its earnings and four times EV/EBITDA. Similarly, CI Financial is trading 7.4 times its earnings and 4.6 times EV/EBITDA.
In 2019, Sprott stock underperformed the broader market. While its stock rose by 16% last year, the TSX Composite Index registered a 19.1% rise. In contrast, it has outperformed the broader market and its peers by a wide margin in 2020.
As of June 25, Sprott has gone up by 54.7% as compared to a 9.5% drop in the TSX Composite benchmark. Meanwhile, the shares of peers — Fiera Capital and CI Financial have lost by 19.7% and 21%, respectively, year to date.
Due to Sprott’s extremely high valuation and lack of strong fundamental support for its recent stock rally, I would avoid buying it at the moment — no matter where it gets listed.