Power Corporation: FVE Up to CAD 41.50 After Incorporating Q1 Results of Its Largest Holdings

We are increasing our fair value estimate for no-moat-rated Power Corporation of Canada POW to CAD 41.50 per share from CAD 40.00 per share as we increase the fair value estimate of Power Corp.’s stake in Great-West Life after incorporating its latest results. Our valuation of Power Corp. is a sum-of-the-parts approach based on our valuations for the underlying ownership interest in Great-West Life, IGM Financial, and other investments, adjusted for corporate overhead. We apply a 10% discount to the underlying net asset value due to the corporate structure and lack of control for shareholders.

We use a fair value estimate of CAD 37 per share for the company’s stake in Great-West Life. Great-West Life’s fair value estimate equates to 2.6 times 2022 tangible book value excluding accumulated other comprehensive income. We are using an 11% cost of equity for computing the fair value estimate of the company. Great-West is an established player in mature insurance markets, which can limit growth opportunities. We project premium growth of midsingle digits in the Canada and U.S. segment and low-single digits for the Europe and reinsurance business. We forecast the firm’s steady-state combined ratio (for insurers’ profitability measure, lower is better) to be largely in line with the long-term average. We forecast an investment yield of 3.80% on the company’s portfolio in the terminal year of our forecast. We expect the firm’s assets under management in the recordkeeping business to grow in midsingle digits as the firm benefits from consolidation in the industry. We expect the firm’s asset management business to remain under pressure in 2023 as rising rates and weaker equity markets weigh on asset valuations before it begins to recover in 2024. We project that the adjusted return to equity excluding AOCI will be around 12.9% in the terminal year of our projection, reflecting our midcycle forecasts for the company.