GMP Capital Inc upgraded at CIBC

CIBC says the near-term outlook for underwriting is not great, but at least it is improving directionally

GMP Capital Inc. was upgraded at CIBC World Markets despite the independent investment dealer’s larger-than-expected fourth-quarter loss.

GMP’s Q4 earnings per share of -11 fell short of analysts’ expectations for a 3 loss, as total revenue dipped 19% and expenses were greater than anticipated.

With the stock down a lot more than 35% in the past year, CIBC analyst Paul Holden thinks GMP’s valuation has become more reasonable given soft market conditions. As a result, he raised his rating to sector performer from sector underperformer, while maintaining a price target of $6.50.

Mr. Holden noted that GMP’s multiple of just one.4x book value is in line using its five-year trailing low, while the company has no debt on its balance sheet and it has excess liquidity you can use to repurchase shares.

“The near-term outlook for underwriting is not great, but a minimum of it is improving directionally,” he explained in a research note.

The analyst also noted that GMP is advising on two notable deals (involving Goldcorp Inc. and Rio Alto Mining Ltd.) which is more optimistic around the M&A outlook, which should provide a near-term earnings boost.

“Market volatility isn\’t good for underwriting and advisory fees, but is good for trading activity,” Mr. Holden said, emphasizing that investment banking is?GMP’s most significant revenue driver.

The fourth quarter demonstrated this very well, as total investment banking revenue fell 37% while trading commissions rose 12%, using the net result as being a 19% drop in total revenue.

The analyst believes Q1 2015 might be another good quarter for trading, but noted GMP really needs better underwriting conditions.

“To determine a significant recovery in revenue and earnings, underwriting activity must pick up,” he said.

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