The Globe and Mail - Very interesting One of the compelling reasons to bet on Power Corporation of Canada
is the substantial discount between the financial conglomerate’s current share price and the loftier value of its operating companies: The discount has been shrinking, and the trend may have further to go.
Power Corp. is a Montreal-based holding company that owns large stakes in a number of financial firms and alternative asset managers. Most significantly, it owns 66.7 per cent of Great-West Lifeco Inc.
and 61.9 per cent of IGM Financial Inc.
– which, in turn, owns a chunk of Wealthsimple Inc., an online wealth-management firm, or robo-adviser.
These holdings have been performing well in 2021. Great-West, a life insurance company, has been resilient during the pandemic and announced a well-timed U.S. deal for the retirement division of MassMutual in 2020. The share price is up 27 per cent this year.
IGM, a wealth-management firm, has been doing especially well because strong stock market activity is underpinning growth in assets and investor interest, while Wealthsimple’s value has soared. IGM’s share price is up 48 per cent this year.
Power Corp.’s share price is up 46 per cent over the same period, which is more than the weighted average of its two key holdings. One reason for this strong performance is that investors have been rewarding the parent company more than they used to.
As a result, the discount to net asset value – essentially the market value of the parent company compared with the value of the operational companies – is shrinking.
Before the company announced a bold corporate reorganization in late 2019, Power Corp. was saddled with organizational complexities, including two publicly traded parent companies that added significant operational costs. These complexities contributed to a steep discount of 29 per cent, on average, over the past five years.
Now, with a more streamlined company and progress toward stripping out $50-million in annual operating costs, the discount has narrowed to about 21 per cent – even as Power Corp.’s net asset value has risen to $52.81 a share from $44.98 in 2019.
Discounts are not unusual among holding companies and conglomerates, which is why some large companies have announced plans to divide themselves into smaller units in the hope of gaining greater appreciation with investors.
General Electric Co. announced this week that it will transform into three public companies that focus on aviation, health care and power. On Friday Johnson & Johnson announced plans to separate its prescription-drug and medical device division from the consumer products division.
In the case of Power Corp., it will likely remain a holding company, and therefore the stock will continue to trade at a significant discount to net asset value. However, the level at which this discount settles could have a large impact on the share price.
Jaeme Gloyn, an analyst at National Bank Financial, expects the discount will retreat to about 17 per cent within the next 12 months.
The numbers behind the bullish case: Mr. Gloyn expects that net asset value will rise 5 per cent, to $56.76 a share, owing to the continuing performance of the operating companies. And Power Corp.’s share price will rise 11 per cent from Friday’s close, to $47, as it further simplifies its corporate structure and investors recognize the holding company’s value.
The more subdued case rests on the assumption that the narrowing discount has already played out and will settle at about 20 per cent. This is partly why Nik Priebe, an analyst at CIBC World Markets, recently downgraded his recommendation on Power Corp. to “neutral” from “outperformer” – the equivalent of shifting from buy to hold.
“We continue to view the strategy favourably and acknowledge that management remains highly focused on execution. However, we simply see less upside,” Mr. Priebe said in a note this week.
Even so, he is upbeat about the company’s prospects even if the discount stabilizes. And the upside if Great-West and IGM perform better than expected and the holding company’s discount narrows to just 15 per cent? Power Corp.’s share price could rally to $55, or up 30 per cent, from Friday’s close.
Discounts are great, es…pecially when they disappear.