CA - Power Corp. Q1 Earnings: Healthy Dividend Growth Discount To NAV Still Narrowing

2023-05-16 02:32:23 ET

Summary

• Power Corporation of Canada offers investors the opportunity to own publicly traded assets at a substantial discount.
• The company as well as its main holding Great-West Lifeco each raised their dividend by 6.1%, effective Q1 2023.
• The holding company’s underlying publicly traded companies are performing well; however, non-core assets have been a drag.
• Great-West Lifeco’s U.S. segment is poised to lead growth into 2023.

Author's note: All figures listed in CAD$ unless otherwise noted.

Investment Thesis

Power Corporation of Canada (PWCDF) ( POW:CA ) main underlying holdings, Great-West Lifeco Inc. ( GWO:CA ) (GWLIF), IGM Financial Inc ( IGM:CA ), and Groupe Bruxelles Lambert SA (GBLBF) are performing well. Shares of Power Corp allow investors to own these great publicly traded companies at a discount to their listed share prices. For a closer look at Power Corp's organizational structure and recent simplifying transactions please see my previous coverage .

NAV Discount Updates

Adjusted NAV per share was $46.89 at March 31, 2023, up from $41.91 at December 31, 2022 and $39.38 at September 30, 2022 . Power Corp's shares are currently trading at 22.3% discount to NAV, slightly wider than its 1-year average of 21%. With a 5-year average discount of 26%, the overall trend however continues to be a narrowing discount to NAV.

NAV has grown while the discount has shrunk, however Power Corp still tends to be ascribed a conglomerate discount based on its sprawling asset mix. Suryansh Sharma, Equity Analyst with Morningstar suggests a 10% discount to a sum of parts valuation is appropriate to arrive at a fair value estimate.

Recent Results

Shares of Power Corp are flat over the past 12 months. The company ended the 4th quarter of 2022 with lower EPS but higher NAV than the previous year. EPS shrank from $0.93 to $0.73 year over year on negative contributions from non-core assets. In the first quarter of 2023, net earnings were $0.47 per share compared to $1.28 per share in Q1 2022. When adjusted for realized gains on asset sales, rate impacts and amortization of intangible assets, adjusted net earnings per share were $0.77 compared to $0.65 in Q1 2022.

Great-West Lifeco Inc. Results

GWO earned adjusted net earnings were $892M, compared with $825M in the 4th quarter of 2021. The insurance giant increased assets by 11% to $701B and assets under administration by 9% to $2.5T over the 12 months ended December 31, 2022. Accompanying its results, GWO also reiterated its medium-term financial objectives including base EPS growth of 8% to 10%.

Building on this momentum, in Q1 2023, GWO grew adjusted net earnings to $808M, from $712M in Q1 2022. In recent months, GWO has advanced the expansion of its consumer wealth management segment through its Empower label, a development expected to drive growth in 2023 and beyond.

IGM Results

IGM ended 2022 with assets under administration of $249.4B, up 4.7% for the quarter, but down 10% from the end of 2021.In the first quarter of 2023, the company made up some ground with assets under management reaching $260B. In the first quarter of 2023, the company achieved relatively flat adjusted net earnings of $207M compared to $219M in Q1 2022.

Despite Mackenzie mutual fund net redemptions of $1.9B in 2022, IGM as a whole saw net inflows of $1.2B driven by a $2.7B contribution from continued growth in high-net-worth clients at IG Wealth. IGM was able to extend this growth in Q1 2023 with net inflows of almost $1B. While down from net inflows of $2.5B in the same quarter of 2022, net inflows are an achievement in a sector that has seen significant redemptions over the past year.

Non-Core Investments Lagged Publicly Traded Companies

On the whole, Power's core GWO and IGM businesses performed well over the past six months with contributions to adjusted net earnings of $682M, an increase of 11.3% over Q1 2022. The past two quarters have been derailed by significant write downs at Sagard and Power Sustainable. Power Sustainable's negative impact of $160M for Q4 2022 included a charge of $63M from the rerating of non-controlling interest liabilities. Power realized a loss of $55M at Sustainable China in the quarter. In the first quarter of 2023, Sagard and Power Sustainable were responsible for a negative contribution of $88M. In Q4 2022, the company's interest in Lion Electric Company ( LEV:CA ) also posted a significant negative contribution of $109M after-tax non-cash impairment charge resulting from a steep decline in market value.

Future Transactions

As both Sagard and Power Sustainable are not currently profitable, it is unlikely that they will be monetized in the near future. Both of these alternative investment platform, though opaque in their contribution to Power's trading value, require additional scale to further transact. Building up both of these entities to a level where a transaction can surface value for Power Corp does not look likely in the near future.

LMPG, a privately held LED lighting solutions provider has been scaling up its business with acquisitions in 2022 and 2023. Peak Achievement Athletics owns established sporting goods brands including Bauer Hockey and Easton Baseball. Power Corp's 42.6% ownership stake is peripheral to its core businesses and is a good candidate for a disposition. The Lion Electric Co is 35.4% owned by Power Corp. While not yet profitable, has been growing revenue. In its most recent Q1 2023 results, Lion Electric achieved revenue of $54.7M compared to $22.6M in Q1 2022. With a healthy order book and growing revenue, Lion Electric is also a candidate to be monetized, however its weak share price performance may mean that Power delays until the share price has recovered somewhat.

Dividend Growth Updates

In 2022, Power Corp paid out $1.3B in dividends to participating shareholders. I last covered Power Corp's dividend profile in April 2022. I am pleased to see the company's pattern of dividend growth continue.

On March 16, 2023, Power Corporation declared a quarterly dividend of $0.5250 per share, representing an increase of 6.1% over the previous quarter. This $0.03 increase was reflected in the dividend payable on May 1, 2023.

This recent dividend increase reflects strength in the underlying life insurance business. Power Corp Chief Executive Officer Jeffery Orr explained on the company's recent earnings call:

That's really flowing through the Great-West Lifeco increase that was announced at their quarter earnings and then making certain adjustments on a pro forma basis for the additional Great-West Life shares that we own and then the lost dividends that we have from having sold CMAC to IGM and when all that comes out in the wash, we flowed it through and we have a 6.1% increase in the dividend.

In addition to dividend growth, Power Corp has been returning capital to shareholders through its NCIB program. Share buybacks in 2022 amounted to 11.2 million shares for a total of $415M. For 2023, Power Corporation has plans to buy back up to 30 million shares over the twelve-month period ending in February 2024. In Q1 2023, Power Corp spent $42M to repurchase 1.2 million shares. Cash proceeds from Power Corp's $575M sale of its China AMC holdings to IGM could fund share buybacks.

Risk Analysis

There are myriad risks for a conglomerate as sprawling as Power Corp. I would categorize Power's risks into two dimensions, the operating risks or the underlying holdings, and the execution risk associated with the company's plan to surface value. From an operational standpoint, the key risks for GWO are related to currency fluctuation and interest rates. Particularly, the appreciation of the Canadian dollar or sustained low interest rates would be headwinds for earnings.

IGM's business is likely to see more pressure on its fund redemptions, especially from its Mackenzie Investments segment. Mutual fund outflows in Canada hit an all-time high in 2022. Mackenzie Investments has experienced a 16% redemption rate on long-term mutual funds, faring better than the Canadian mutual fund industry, which has averaged close to 18% fund redemptions. While better than the industry, this segment, which contributes nearly a quarter of operating income to IGM lags IG's wealth management segment that has averaged less than 10% redemptions over the past decade.

From an execution perspective, Power Corp has significant work to do in narrowing its discount to NAV. This process will require building confidence with investors and increasing transparency. The company has made strides in simplifying its organizational structure; however, investors remain in the dark as to the timing of further narrowing transactions. Ultimately, both Sagard and Power Sustainable will need to be built up before a transaction can be leveraged to unearth value for Power Corp. It remains unclear by what mechanism, Power Corp will surface value from these two alternative asset platforms. This uncertainty contributes to the trading discount. While a conglomerate discount may persist given the diversity of holdings, the company can mitigate this discount by exiting non-core industries wholesale to focus on financial services.

Investor Takeaways

In addition to steady dividend growth, the opportunity available to shareholders of Power Corp is the narrowing of its NAV to market value. The firm's publicly listed assets, which comprise over 80% of NAV should trade at their par value on major exchanges. Clarity and transparency on the composition of Power Corp's unlisted underlying holdings is key to that gap narrowing. The company has levers available at the operating asset and holding company level to continue surfacing value. In 2023 and 2024, I will continue to look for increased clarity on the future profitability of Sagard and Power Sustainable as well as the disposition of non-core assets including Lion Electric, LMPG and Peak Achievement Athletics.

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