Power Corporation (TSX: POW) is a diverse international financial and holding company that was incorporated in 1925. The company’s biggest asset is a 65% stake in Power Financial, ownership of Power Energy and various media and news assets, and is controlled by the wealthy Desmarais family of Montreal.
Great-West Lifeco and IGM Financial are the largest drivers of earnings and dividends for Power Corp. The net asset value discount of Power Financial is 18.5% compared to the 10-year average of 19.5%, and the price-to-earnings multiple is trading at a discount to historical averages. Great-West recently reported below sub-par investment results amid escalating Brexit risks.
Subsequent to the second quarter, Power Corp. acquired a 100% equity interest in Nautilus Solar Energy, a company that acquires, develops, finances, and manages distributed solar projects. Overall, Power Corp.’s second-quarter results were satisfactory. Income from investments amounted to $70 million. A large portion of the income came from Sagard China ($55 million) and hedge funds ($20 million). Income from China AMC at $8 million was flat year over year. There were also marginal losses at Sagard Europe and Sagard Holdings, subsidiaries of Power Corp.
Great-West Lifeco is the largest driver of Power Financial’s results, comprising approximately 76% of net asset value. Great-West Life is one of Canada’s large life insurance companies and is exposed to several risks typical of the life insurance industry, including mortality, morbidity, interest rates, fixed-income volatility, asset default, operating risks, key management personnel risk, and strategic risk.
New legal and compliance requirements for life insurance companies are expected to be executed over the next several years. It is possible that these new requirements will have an unfavourable impact on Great-West Life and require the company will have to raise additional equity and debt. Great-West is expected to be impacted by life insurance company requirements imposed by the Office of the Superintendent of Financial Institutions (OSFI) and will be required to maintain a Life Insurance Adequacy Test Core Ratio of 55% and a Total Ratio of 90%.
IGM Financial is the next largest subsidiary for Power Financial, representing approximately 22% of Power Financial’s net equity value. The valuation for IGM Financial is highly dependent on assets under management (AUM). Most of the AUM is invested in the capital markets and, accordingly, capital market returns can have a huge impact on AUM. Poor investment returns can also result in redemptions and drop in AUM. IGM also faces significant competition in the asset management sector and has been negatively impacted by the popularity of exchange traded funds.
Pargesa is approximately 10% of Power Financial’s estimated net equity value. Pargesa’s share price is denominated in Swiss currency and results in direct foreign exchange risk for Power Financial. Pargesa is a holding company whose share price is impacted by changes in the discount to net equity value. A wide range of businesses held by Pargesa reduce impact of any single industry, but earnings is usually impacted by macroeconomic factors.
POW is trading at an 18.5% discount to net equity value, and the stock is very cheap when compared to Canada’s high dividend payers.
Expect exciting things from Power Corp. in the future!
