CIBC: Target at 44$ from 41$No Change To Our Outperformer Thesis Following Q1
Our Conclusion
Power Corporation experienced another quarter of strong double-digit NAV growth, which was largely expected. In addition to strong performance from the public companies, NAV growth also benefitted from the recently announced funding round at Wealthsimple. We estimate that Power trades at a 27% discount to its current NAV, which is essentially unchanged despite the persistent progress in cost reductions and value creation at the private company level. We are reiterating our Outperformer rating and raising our price target price to $44 from $41 to reflect the continued NAV growth.
Key Points
Another quarter of strong NAV growth, as expected. Net asset value per share increased 11% on a sequential basis, supported by strong performance from the underlying operating subsidiaries. Great-West Lifeco (Outperformer rating, $40 target, covered by Paul Holden) and IGM Financial (Outperformer rating, $49 target) both outperformed in Q1, advancing 10% and 11%, respectively, versus the S&P/TSX Composite Index at 7%. NAV growth was also supported by a step-up in the value of non-public investments and cash, which increased 7%. This appears largely driven by the growth in value of POW’s investment in Wealthsimple, which increased due to the recently announced funding round. We estimate that NAV per share increased a further 10% after the quarter-end (including a $351 million increase in the value of Lion associated with its public listing in May).
Wealthsimple funding round was modestly accretive to NAV. As we highlighted last week, we felt the decision to take money off the table on the Wealthsimple investment was prudent given the significant run-up in value over the past seven months. Power Corporation indicated that the financing increased the value of its investment (including proceeds from the secondary offering) by $633 million or ~2% of NAV. At an 80% compounded annual return, this investment was clearly a home run for the Power group of companies. Net proceeds from the secondary offering ($164 million) will further reinforce an already strong corporate liquidity position of $1.3 billion.
Other updates were also as expected. POW indicated that it has achieved 66% of its targeted $50 million in annualized expense reductions. This reflects positive progress from the prior quarter at 61%. As previously indicated, the company started repurchasing stock again under its NCIB to offset dilution from the exercise of stock options. In Q1, the company repurchased 1.2 million shares or 0.2% of total shares outstanding.
Valuation unchanged. We estimate that Power Corporation trades at a 27% discount to its current NAV, which is essentially unchanged from the last update in March. We continue to advocate that POW should trade at a narrower discount, particularly in the context of recent expense reductions and value-creation efforts