Genuity Research delves into trading and ABCP losses at Canaccord

With a lull in AIM financings (“Whatever became of the AIM?“, October 3-07), it should not come as a surprise that revenue growth at Canaccord Capital Inc. (CCI:TSX) is a challenge — the Adams division and its AIM financings was a key part of what drove the top and bottom line over the past few quarters. But Genuity’s research analyst is more interested in a $4.4 million asset-backed commerical paper writedown (about 10% of holdings) and $10 million in losses on the trading desk during the quarter. Wow. Lots of firms give guys the gun for trading hits smaller than that.

“Canaccord Capital Inc.
Target: $21.00
Recommendation: Hold
Risk Rating: Above Average

Bitter today. Better tomorrow?

Canaccord Capital (CCI) released fiscal Q2/08 results last night. EPS of $0.26 came in below our $0.36 estimate and represented a 30% YoY decrease. Due to a $4.4 million write-down of its ABCP holdings, the company was compelled to release its quarterly results ahead of schedule.

$4.4 million (pre-tax) of ABCP write-downs reduced EPS by $0.05. Management has disclosed that it holds $43.2 million of ABCP on its balance sheet.

Principal trading losses were more concerning than ABCP. We estimate CCI experienced up to $10 million in principal trading losses during the quarter. Management is reducing capital allocation to this activity. Although this quarter’s results are disappointing, we cannot ignore that CCI has consistently delivered principal trading gains in prior periods.

Aside from the two issues described above, the quarter was within our expectations. The Canadian capital markets business showed modest growth, buoyed by equity financing activity. U.K. revenues dropped 3.9% YoY, in line with the slowdown we have observed in that marketplace. The U.S. division showed good revenue growth, at 12.1% YoY; ongoing investments in long-term growth initiatives, though, led to an operating loss.

We have concerns, but CCI’s outlook is pretty good. Markets have rebounded from August lows and CCI’s participation in equity financings so far in calendar Q4/07 is ahead of last year’s pace. The problem is, given recent developments in the U.S., we do not believe investors will easily overlook a brokerage taking significant proprietary trading losses that put into question risk management practices.”

MRM