EUR 850.00 For Business Accounts Only

Morningstar | Power Corp Benefits From Market Gains and Cost-Cutting at Top-Holding Power Financial. See Updated Analyst Note from 14 May 2019

No-moat Power Corporation posted good first-quarter results, with market-driven gains at top-holding Power Financial and better results at Sagard contributing to a sequential net earnings per share improvement of 29%, up from $0.49 to $0.62. Although net earnings were down significantly compared with first-quarter 2018, the difference can be attributed to one-time distributions at portfolio company Sagard Europe. After removing the effect of these distributions and recent accounting changes at Power Financial’s Pargesa, earnings were about in line with previous quarter results. Corporate costs detract directly from shareholder returns given Power Corp’s holding company structure, and we believe the 10% year-over-year decline in operating and other expenses is a positive development for investors. In April, Power Corp’s interest in Power Financial decreased to 64.1% from 65.5% because of its participation in Power Financial’s share repurchase program. This ownership adjustment, and Power Financial’s equivalent decreased ownership of Great-West Lifeco, was precipitated by Great-West’s CAD 2 billion substantial issuer bid. In its earnings release, Power Corp also announced a 6% increase in the dividend, which is now at $1.62 per share, annualized.  After adjusting for the decreased ownership of Power Financial and the results of other portfolio companies in the first quarter, we’re maintaining our fair value estimate of CAD 29 per share.

By our estimate, Great-West accounts for about 64% of Power Corp’s total equity value, excluding corporate costs. Great West was affected by several headwinds in the first quarter, resulting in an annualized decline in earnings of 10%. Still, apart from continued net outflows at Putnam, we don’t believe these difficulties represent long-term threats to the business. In the U.S., results were pretty good, with sequential income growth of over 15% in both individual markets and Empower Retirement. Empower benefited from a large sale in the quarter, which should provide momentum for fee income growth over the next 12-18 months. In Canada, higher net investment income was more than offset by lower fee income and higher taxes. The Europe segment also experienced a material increase in income taxes, though earnings before taxes remained the same as in the fourth quarter. The effective tax rate for Europe in the first quarter was 11% compared with a positive tax impact of 3% last quarter. We continue to expect the effective tax rate to remain somewhat unpredictable, and management didn’t provide much guidance on the call for segment-specific tax run rates. Rising equity markets in the quarter led to a CAD 4.3 billion fair value adjustment on the income statement, the first such positive adjustment since the second quarter of last year. These income gains were offset by higher market-driven liabilities and, on balance, EBIT was up 5%. However, higher taxes and lower premium income led to overall sequential net earnings decline of about 7.5%. Even considering the challenges faced in the quarter, Great West’s annualized ROE was a healthy 13.5%, above our 11% cost of equity. Overall, earnings were generally in line with our expectations.

By our estimate, IGM Financial accounts for about 16% of Power Corp’s total equity value, excluding corporate costs. There was little in narrow-moat IGM Financial's first-quarter results that would alter our long-term view of the firm. IGM closed out March with CAD 160.5 billion in managed assets, up 7.6% sequentially and 3.0% year over year. Investors Group, which accounted for 56% of the firm's assets under management at the end of the first quarter, reported a 7.5% sequential and 2.6% year-over-year increase in its managed assets, as market gains offset its fourth consecutive quarter of outflows. Mackenzie Investments, which accounted for 41% of AUM, recorded a 7.9% sequential and 3.8% year-over-year increase in its managed assets, with the firm continuing to generate positive flows from its mutual fund and exchange-traded funds operations. Investment Planning Counsel, which is IGM's smallest segment, reported a 5.9% sequential increase and a 0.5% year-over-year decrease in its managed assets.