May 19, 2010 / 10:57 AM / 8 years ago

UPDATE 3-Canaccord profit rises as Genuity absorbed

* Q4 net EPS C$0.14 vs C$0.07

* Core EPS C$0.21, exceeds C$0.16 expectations

* Revenue rises 33.8 pct, expenses up 32.4 pct (Adds details, executive comments)

By Andrea Hopkins and John McCrank

TORONTO, May 19 (Reuters) - Canaccord Financial (CF.TO) said quarterly core earnings more than tripled and revenues surged, though expenses also rose sharply after the investment dealer’s recent takeover of Genuity Capital Markets.

The Vancouver-based company said it earned C$11.1 million ($10.6 million), or 21 Canadian cents a share, in its fiscal 2010 fourth quarter, ended March 31. That was up from C$3.8 million, or 7 Canadian cents, a year earlier.

The results excluded C$5 million in pre-tax costs related to the purchase of Genuity, a boutique Canadian investment bank specializing in mergers and acquisitions and advisory services. The acquisition, which closed in April, more than doubled the size of Canaccord.

Net income rose to C$7.5 million, or 14 Canadian cents a share, up from C$3.7 million, or 7 Canadian cents.

Revenues rose 33.8 percent to C$143.1 million.

Analysts had expected, on average, earnings of 16 Canadian cents a share, excluding one-time expenses, and revenue of C$133.5 million, according to Thomson Reuters I/B/E/S.

Shares of Canaccord, which have fallen around 20 percent in the past month and a half, dropped 1.8 percent at C$9.27 on the Toronto Stock Exchange on Wednesday afternoon.

INVESTORS, COMPANY, LOOKING FORWARD

The latest “results feel like almost an afterthought as investors look ahead of the potential earnings power of the combined Canaccord-Genuity franchise,” Sumit Malhotra of Macquarie Equities Research said in a report.

Canaccord, one of the country’s top independent brokerages, has built a strong presence in Canada’s mining sector, particular among juniors and midcaps. The firm, with 37 offices worldwide, has also developed a strong presence in China.

The takeover of Genuity gives it a well-connected M&A shop whose bankers have ties to some of the country’s top companies, such as Air Canada ACa.TO ACb.TO, the No. 1 Canadian airline.

Paul Reynolds, chief executive of Canaccord, told analysts on a call that his firm “has had some very interesting M&A wins” that Canaccord would not have experienced before the deal and that Canaccord products are being brought over into the original Genuity client base.

“I think from an overall revenue-accretive standpoint, which we didn’t factor into any of those synergy calculations or deal economics, we’re certainly seeing some very tangible results thus far.”

Reynolds said the firm would continue to look for deals, as long as they came at a reasonable price.

“If we saw things that were a strong cultural and strategic fit to our business and were accretive to earnings, we would definitely be interested, especially in the UK and the U.S.,” he said.

    Reynolds said the firm was also looking at some opportunities in China. “We are evaluating them and there will be more to come on that over time.”

    PROFITABILITY RISES, AS DO EXPENSES

    Cutting out acquisition costs, return on equity, a key measure of profitability, rose to 7.6 percent from 4 percent, while working capital rose C$72.5 million to C$358.6 million.

    Assets under management climbed 13.2 percent to C$445 million and assets under administration climbed 40.7 percent to C$12.9 billion.

    Expenses in the quarter were also higher, rising 32.4 percent to C$132.6 million.

    “While this increase in in line with the quarter’s higher revenues, a large portion of it can be attributed to higher incentive compensation,” Reynolds said.

    He said the expenses included the fully realized costs of the firm’s long-term incentive plan and its retention program in its wealth management business, both initiated in previous years.

    “That said, I want to assure you that we are actively addressing both operating and compensation costs,” he said.

    Canaccord is modifying its compensation structure, which includes changing to a semi-annual bonus structure and lowering its profit share distribution.

    “These initiatives, combined with the expected cost recoveries from operating synergies with Genuity should have a material impact on lowering our expense line,” Reynolds said.

    $1=$1.05 Canadian Additional reporting by Scott Anderson and Pav Jordan; Editing by Frank McGurty

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