CA - Power Corporation of Canada: Unlocking Value In Complexity The Hidden Worth

2023-12-26 08:32:32 ET

Summary

• Power Corporation of Canada may be significantly undervalued due to its extensive operations in financial services.
• The company's core holdings, including Lifeco, IGM Financial, GBL, and Wealthsimple, have strong market presence and growth potential.
• Power Corporation's complex structure and interrelated entities pose challenges and risks, but its strategic initiatives and financial performance support its undervaluation.

Power Corporation of Canada (POW:CA), with its extensive and multifaceted operations in financial services, might be significantly undervalued. Despite the inherent complexities due to its vast network of interrelated entities and investments, the sum of its parts analysis and comparison with industry peers suggest a potential undervaluation.

Introduction:

Power Corporation, with a market capitalization of $24.7 billion as of December 22, 2023, is an international management and holding company with a focus on financial services in North America, Europe, and Asia. Its core holdings are leading insurance, retirement, wealth management, and investment businesses, including a portfolio of alternative asset investment platforms. Power Corporation operates through two main segments: Lifeco (68.1% interest), IGM Financial (62.1% interest) in addition to GBL (15.5% interest) and investments in alternative asset investment platforms. Power Corporation's structure is extremely complex and very difficult to comprehend. Businesses conduct transactions with each other and are cross-owned in multiple ways. I aim to provide an overview of the business in simple terms and why the company is undervalued in terms easy to understand.

Lifeco (Previously Great-West Lifeco Inc.) (GWO:CA) : Lifeco, with a market capitalization of $40 billion as of December 22, 2023, is an international financial services holding company with interests in life insurance, health insurance, retirement, investment services, asset management, and reinsurance businesses. It operates primarily in Canada, the U.S., and Europe under brands such as Canada Life, Empower, Putnam Investments, and Irish Life. Lifeco has four major reportable segments: Canada, the United States, Europe, and Capital and Risk Solutions. It focuses on three key value drivers: Workplace Solutions, Wealth & Asset Management, and Insurance & Risk Solutions??.

IGM Financial (IGM:CA) : IGM Financial, with a market capitalization of $8.5 billion as of December 22, 2023, is a leading wealth and asset management company. It supports advisors and clients in Canada and institutional investors globally. IGM’s principal operating subsidiaries are IG Wealth Management and Mackenzie Investments. It operates in three segments: Wealth Management, Asset Management, and Strategic Investments and Other. The Wealth Management segment offers a comprehensive range of financial products and services in areas like advanced financial planning, insurance, and securities. The Asset Management segment provides investment management services to a suite of investment funds and institutional investors??.

GBL (EBR: GBLB) : GBL, a Belgian holding company listed on the Brussels Stock Exchange, had a market capitalization of €10.4 billion as of December 22, 2023. Established as an investment holding company, GBL stands out as a leading and active investor in Europe, focused on long-term value creation supported by a stable family shareholder base. GBL is growing its third-party asset management activities via Sienna Investment Managers, a wholly owned subsidiary, positioning itself as an active professional investor contributing to the value creation of global companies that are leaders in their respective sectors??.

Alternative Asset Investment Platforms : Since launching the first Sagard fund in Europe in 2002, Power Corporation has developed alternative asset investment platforms managing portfolios in several alternative asset classes across Europe, North America, and China. These platforms offer strategies in venture capital, private equity, private credit, real estate, and infrastructure. Sagard and Power Sustainable are two such platforms. They aim to generate attractive returns by attracting experienced investment teams, leveraging the global network of the Power group, and providing flexible capital solutions. Power Corporation invests proprietary capital in these platforms to support their growth and development as well as earnings fees on capital managed. The platforms focus on both income-related strategies like Private Credit and Royalties and capital appreciation strategies like Venture Capital & Growth Private Equity??.

Wealthsimple : Wealthsimple (Owned indirectly at 54.2% interest by Power Corp) is one of Canada's largest and fastest-growing digital investing platforms and a prominent player among financial technology companies. As of December 22, 2023, it boasted a substantial client base of over 2.3 million across the Canadian market with a target of quadrupling assets to C$100 billion in five years . Wealthsimple was recently valued at $2 billion in 2023 despite a recent round of layoffs. The platform continues to expand its market presence and offers a diverse suite of financial products that cater to various needs, including investing, spending, saving, and tax. Additionally, Wealthsimple provides access to private asset funds to retail investors, including a venture capital and growth equity fund. Further enhancing its offerings, Wealthsimple, in partnership with Sagard (also part of Power Corporation), launched Wealthsimple Private Credit in the first quarter of 2023. This investment fund primarily targets investments in senior secured credit and is managed by Sagard’s private credit team, marking another step in Wealthsimple's journey to offer comprehensive and innovative financial solutions??.

Financial Highlights:

• Net earnings for the quarter ended September 30, 2023 was a record of $997 million compared with $642 million in the same quarter in 2022.
• Adjusted net asset value per share has grown to $48.26 at September 30, 2023.
• Shareholders' equity has grown substantially since 2019 from $14 billion to $22 billion as of September 30, 2023
• For Lifeco, net earnings were $936 million, compared with $986 million in the third quarter of 2022.
• For IGM, Third quarter net earnings were $209.8 million, compared with $216.1 million in the third quarter of 2022.
• GBL reported a net asset value of €16.0 billion at September 30, 2023, or €109.19 per share, compared with €17.8 billion or €116.18 per share at December 31, 2022.

Despite declining earnings at Lifeco, IGM and GBL in Q3 2023, Power Corporation reported fairly strong earnings demonstrating its ability to navigate economic challenges and diversify its exposure.

Strategic Initiatives and Performance:

• Lifeco : Demonstrated strong growth in earnings, particularly emphasizing wealth management businesses. Recent acquisitions and operational improvements have yielded solid results, indicating a strategic focus on building wealth management across various geographies.
• IGM Financial : Reported consistent earnings, supported by IG Wealth and MacKenzie. Though facing outflows in a challenging market, IGM demonstrates resilience and a focus on future growth.
• Sagard Holdings : Completed a transaction with ADQ and BMO, indicating a strategic move to strengthen and broaden the Sagard franchise.
• Alternatives Platforms : Despite a tough funding environment, raised $1.2 billion in new commitments in Q3.

Valuation Insights:

Lifeco alone is valued at $40 billion, which implies that Power Corporation's 68.1% ownership in Lifeco is worth $27.2 billion. This is already significantly higher than Power Corporation's current market capitalization of $24.7 billion. Not to mention, Power Corporation's 62.1% ownership in IGM is worth $5.3 billion, Power Corporation's 15.5% stake in GBL is worth $2.35 billion, and Power Corporation's 54.2% ownership in Wealthsimple is worth $1 billion.

Considering the information publicly known without considering other investments held by Power Corporation directly, Power Corporation's ownership in Lifeco, IGM, GBL and Wealthsimple should be worth at about $35.85 billion.

Compared to $24.7 billion market capitalization, this implies a valuation gap of 45% by summing its parts.

In addition, Power Corporation can be best compared to Fairfax Financial Holdings (FFH:CA) in terms of the nature of their business model. Fairfax's market capitalization as of December 22, 2023 was $29.2 billion . Provided that Fairfax's shareholders' equity as of September 30, 2023 was $21.6 billion, it implies a multiple of 1.35 while Power Corporation's multiple to shareholders' equity is merely 1.12.

Both analyzing sum of its parts and multiple to shareholders' equity suggest that Power Corporation is undervalued compared to its peers.

Challenges and Considerations:

Power Corporation faces various challenges and risks inherent in its operations and investment strategies:

Complex Inter-Entity Transactions : Power Corporation's extensive network of subsidiaries and investments brings complexity to its transactions, potentially obscuring the true financial health and risks of the entities involved. The interconnectedness of its controlled or influenced entities can create intricate financial relationships, making it difficult for investors to understand the full scope of risks or to assess the true performance of the company. This complexity can lead to misvaluation or overlooked risks. For example, on April 3, 2023 , Lifeco and IGM announced that they have entered into an agreement whereby Lifeco will acquire 100% of Investment Planning Counsel Inc. ((IPC)), an independent wealth management firm, from IGM, for cash consideration of $575 million.

Market and Economic Fluctuations : As a holding company with interests in financial services, Power Corporation is subject to the volatility and risks inherent in the financial markets. Changes in interest rates, economic downturns, and market disruptions can affect the company's investment performance and the valuation of its holdings. Additionally, fluctuations in foreign exchange rates can impact its earnings, especially given its international presence. For example, in mid-2022 , Wealthsimple laid off 13 per cent of staff amid market volatility.

Regulatory Risks : The financial services industry is heavily regulated. Changes in regulations or non-compliance with laws in any of the countries where Power Corporation operates can lead to penalties, losses, or reputational damage. This includes regulations related to banking, insurance, asset management, and cross-border transactions.

Competition and Industry Changes : Power Corporation operates in competitive financial and investment markets. Rapid changes in technology, consumer preferences, and industry standards can impact the competitiveness of its holdings. The company must continually adapt to these changes to maintain its market position and ensure the growth and profitability of its investments. Failure to effectively respond to these changes can lead to lost opportunities or diminished returns.

Forward-Looking Insights:

• Growth Prospects : Both Lifeco and IGM have been strategically repositioned for significant growth. Particularly, Great-West Lifeco's focus on wealth management and organic growth in the U.S. presents robust future potential. In addition, Wealthsimple is still growing fast despite the setback in 2022. Wealthsimple's assets under management and number of clients have exceeded $25 billion and 3 million respectively in 2023.
• Investment in Alternatives : Continued investment in Sagard and other alternative platforms, despite a challenging fundraising environment, shows a commitment to diversified growth strategies.
• Cash Position and Share Buybacks : Active share buybacks demonstrate a commitment to enhancing shareholder value, though careful management of cash levels and commitments is noted.

Conclusion:

Power Corporation presents a compelling case for undervaluation when dissecting its complex structure and considering the combined value of its significant holdings. The company's strategic position in diverse financial services and investments, coupled with its robust financial performance and strategic growth initiatives, underscores its potential for long-term value creation. However, investors must carefully navigate the inherent complexities and risks associated with its interconnected entities.

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