Power Corp. of Canada shares are trading at a curiously large discount to the underlying value of its international assets. And this discount is exactly where the greatest upside to the stock may be sitting.
Okay, even a quick summary of these assets can boggle the mind.
Power Corp. (POW-T) owns Power Financial Corp., which in turn owns a 66.9-per-cent stake in Canadian insurer Great-West Lifeco Inc. (GWO-T), a 62.1-per-cent stake in wealth management firm IGM Financial Inc. (IGM-T), a 44.5-per-cent stake in the Switzerland-based investor Pargesa and an 83.6-per-cent stake in the online investment firm Wealthsimple Financial Corp. Power Corp. also owns investment platforms such as Sagard Holdings.
Beneath this layer of holdings by Power Financial resides another, consisting of Putnam Investments, Mackenzie Investments and others.
As complex as this structure might appear, it actually follows considerable streamlining: The merger of Power Corp. of Canada with Power Financial, completed in February, created a single holding company – Power Corp. of Canada. As part of this reorganization, the controlling Desmarais family gave up top executive positions.
The result, so far, has no doubt disappointed many investors. Power Corp. shares, while well off their lows in March during the pandemic lockdown, are down 21 per cent year-to-date.
But there’s an interesting valuation metric here that gives the stock a curious appeal: Analysts note that the stock trades at a deep discount to its net asset value (or NAV, the estimated fair value of assets minus net debt).
RBC Dominion Securities analyst Geoffrey Kwan estimated in a recent note that the current NAV is $37.54 a share. The shares closed on Monday at $25.73, which is $11.81 or 31.4 per cent below NAV.
A discount is not unusual with diversified companies with many holdings. These companies often suffer what is known as a conglomerate discount, where the whole is valued less than the sum of its operating subsidiaries. That’s partly because conglomerates add a layer of overhead expenses.
But the current Power Corp. discount, though in line with the five-year average, has spiked in recent months. Soon after the reorganization, Power Corp.’s discount narrowed to about 20 per cent, as investors welcomed the newer shareholder-friendly structure and cost savings.
The bullish bet on the stock is that today’s wide discount will narrow as investors become more comfortable in the financial performance of key operations such as Great-West and IGM, and recognize the benefits of the reorganization, which has stripped out costs.
CIBC World Markets analyst Nik Priebe, who estimates Power Corp.‘s NAV at $33.36 a share (lower than RBC’s estimate), noted that the company expects to save about $50-million a year because of its reorganization. That adds up to some serious savings over 10 years, and implies that Power Corp.‘s discount to NAV should be about 7 per cent.
“Some may argue that a steeper discount is warranted given the concentrated voting control and the difficulty verifying the value of Power’s other assets. In general, however, this simplified approach clearly suggests upside,” Mr. Priebe said in a recent note.
The analyst also looked at the break-up value of the company and factored in the estimated tax liability. Using this approach, Mr. Priebe calculated a 15-per-cent discount to NAV. That’s also a significant improvement over the current discount, and implies potential upside to the share price.
Admittedly, Power Corp.‘s history of trading at a discount to NAV suggests this valuation metric can be a frustrating approach for investors hoping for a quick return. And, of course, the discount could always widen.
But the stock’s hefty dividend offers a nice backstop here: The yield is about 6.9 per cent. The company reaffirmed the quarterly payout in its recent second-quarter results, bolstering confidence that the dividend is sound and giving current investors a good reason to stick around.
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