May 20, 2009 / 11:55 AM / in 9 years

UPDATE 3-Canaccord Capital posts surprise quarterly profit

* Q4 EPS C$0.07, cost-cutting credited

* Revenue falls 25.4 percent to C$107 million

* Dividend remains suspended to preserve capital

* Shares surge 8.4 pct to C$7.86 (Adds analyst, executive comments; updates share price)

By Andrea Hopkins

TORONTO, May 20 (Reuters) - Canaccord Capital Inc CCI.TO reported a surprise quarterly profit on Wednesday as heavy cost cuts offset a drop in revenue, sending its shares up more than 8 percent.

The Canadian investment dealer said efforts to reduce spending by cutting compensation and general operating expenses had begun to pay off, ending two consecutive quarters of losses at the Vancouver-based company.

Shares of Canaccord shot up 8.4 percent to C$7.86 in Toronto as investors applauded the belt-tightening. Analysts said the cost-cutting discipline could help Canaccord as it adjusts to the grim economy and slower business.

“Though we continue to have a cautious view on the revenue outlook, we believe the signs of progress in expense management for Canaccord this quarter will be viewed favorably by the market,” Macquarie analyst Sumit Malhotra said in a research note.

Canaccord said net income for the fourth quarter, excluding C$0.1 million of restructuring costs, was C$3.8 million ($3.3 million), or 7 Canadian cents a share, down from C$7.2 million, or 15 Canadian cents a share, a year earlier.

Revenue in the quarter, which ended March 31, fell 25.4 percent to C$107 million from C$143.4 million in the final quarter of 2008.

Canaccord Capital President and Chief Executive Paul Reynolds said the company met the bad operating environment with cost cuts designed to stem losses that plagued the balance sheet earlier in the year.

“The cost-saving has come out of every single department in every single geography.... Everybody gave something across the organization and there was pain, or shared contribution, everywhere,” Reynolds told a conference call.

While Reynolds said Canaccord was seeing “the early signs of an upturn” in its business volume, analyst Malhotra remained cautious about how quickly things could improve.

“Despite the improvement in market conditions, our analysis indicates that investment banking deal flow for Canaccord has thus far been slow to pick up,” Malhotra wrote.

Canaccord, which has operations in Canada, the United States and Britain, focuses on advising small to medium-sized resource companies.

COST REDUCTIONS

The company said its board had decided to continue the suspension of its dividend to “enable Canaccord to preserve its working capital and book value, as well as to position the company to take advantage of growth opportunities that may become available.”

Analysts, on average, had expected a loss of 9 Canadian cents a share, excluding items, on revenue of C$99.7 million, according to Reuters Estimates.

The big surprise came on the expenses side of the balance sheet, as quarterly expenses dropped 24 percent to C$100.2 million, from C$131.6 million a year ago.

A 23 percent drop in quarter-over-quarter general and administrative expenses drove savings.

On March 31, Canaccord said it was extending its cost reduction program to include measures like consolidation of back office support and deferring of certain rewards programs. [ID:nBNG485731]

The net loss for the year ended March 31 was C$47.7 million, or 97 Canadian cents a diluted share.

Canaccord said the annual results included “significant items” totaling C$51 million taken in the third quarter, including adjustments related to its exposure to asset-backed commercial paper, impairment of goodwill and intangibles and restructuring costs.

Excluding significant items, net loss for the year was C$1.4 million, or 3 Canadian cents a share, compared with net income of C$79.3 million, or C$1.63 a share, in fiscal 2008.

In January, Canaccord announced the completion of its repurchase program for restructured third-party asset backed commercial paper.

Earlier that month, a plan was implemented to restructure billions of dollars worth of commercial paper, allowing small investors to get their money back after the ABCP market seized up in 2007.

Canaccord’s assets under management fell to C$393 million in the fourth quarter, down 46.2 percent from C$730 million a year earlier.

$1=$1.14 Canadian Additional reporting by Ashutosh Joshi in Bangalore; Editing by Rob Wilson

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