Every time I see someone analyze Power Financial Corporation (TSX:PWF), the thesis is pretty much the same.
Based on the value of its underlying holdings, the stock is definitely undervalued. Power Financial owns 67.1% of Great-West Lifeco Inc., 58.7% of IGM Financial Inc. (TSX: IGM), and a 50% interest in Parjointco, a joint venture with the Frere family of Belgium. Parjointco owns positions in companies like Lafarge, Total, and GDF Suez, among others. Then, to make things more complicated, Power Corporation of Canada (TSX: POW) owns 65.7% of Power Financial.
It’s not that it’s an overly complicated ownership structure, but it just seems a little strange. With a few clicks of a mouse I can own shares in Great-West Lifeco and IGM, so why would I own Power Financial, especially since those two companies are much larger than the stake in Parjointco? It just seems like an inefficient way to get exposure to the underlying companies.
Many investors agree with me because the value of Power Financial trades at a discount to the sum of its underlying holdings. If you want to go further up the organizational chart, Power Corporation trades at an even bigger discount. Power Financial is worth about 25% less than the value of its holdings, while Power Corporation trades at a discount closer to 30%.
But before investors go snapping up shares based on that discount alone, remember one important thing. These two companies always trade at a discount to the value of the holdings. Without breaking them up, there’s little hope of ever extracting that value. And considering that both are controlled by the Desmarais family, the chances of that are unlikely. Besides, the Desmarais family is one of Canada’s most wealthy families. They’re obviously doing something right.
A different reason to buy
One advantage the Power group of companies has is the ability to work together on projects. They can use their collective resources to get behind something.
Both companies are also sitting on a mountain of cash. Power Corporation has $4.4 billion worth of it, while Power Financial is sitting on about $4 billion. That’s a lot of dry powder.
Management might be planning is to take IGM Financial private. The company has struggled lately as investors have soured on the mutual fund business. Many people are shedding expensive mutual funds for ETFs, and the Internet has democratized investing. An Investors Group associate used to have a real knowledge advantage over the average investor. That’s still probably true today, but an investor can easily bridge that gap themselves.
Still, there’s value in the brand. There are millions of Canadians who don’t have the time or the inclination to take care of their own finances. There’s still plenty of opportunity to market to these people. Demographics will also likely work out in the company’s favour.
IGM Financial is currently a pretty inexpensive stock. The company currently trades at just 15 times earnings, and only 12 times next year’s expected earnings. The dividend yield is also 4.7%, which is among the highest in the sector. If the market continues to undervalue IGM, it makes sense to take it private.
IGM has a current market cap of $11.7 billion. Since Power Financial already owns 58.7% of it, it would only take $4.8 billion to take the company private. Even after accounting for paying a premium, both Power companies easily have the cash to do it.
Even if the Desmarais family doesn’t decide to take IGM private, there’s still a bunch of cash waiting to be deployed. That’s the reason to be bullish on Power Financial. At some point, a deal will be made. And knowing the history of the family, it’ll likely be a good one. And in the meantime, you’re paid 3.9% to wait, and the company is likely to be a solid performer.
