EUR 850.00 For Business Accounts Only

Morningstar | Power Financial Benefits From Market-Related Gains at Top-Holding Great-West Lifeco. See Updated Analyst Note from 13 May 2019

No-moat Power Financial posted good first-quarter results, with market-driven gains at Great-West and IGM offsetting marginally higher corporate expenses. Though net earnings for the quarter were down 8.5% to CAD 536 million from CAD 586 million the year prior, Power saw a net earnings gain of 12% compared with the fourth quarter. On a per share basis, net earnings increased 8 cents, from $0.67 to $0.75. Adjusted net earnings at Pargesa were up significantly from negative CAD 53 million last quarter to CAD 46 million. This jump is explained by one-time impairment charges related to accounting changes that occurred late last year. By our estimate, Pargesa accounts for about 8% of Power Financial’s value. Management did not provide any color in the earnings release for the continued trend of increasing corporate expenses, which were up 11.5% year over year, and we reiterate to investors that these costs directly reduce shareholder returns given Power Financial’s structure as a holding company. In April, Power’s interest in Great-West decreased to 66.8% from 67.8% because of its participation in Great-West’s CAD 2 billion share repurchase program.

After making an adjustment for the decreased ownership level of Great-West and the results of Power’s 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 74% 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 the individual markets and Empower Retirement business. 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 18% 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. The company 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.