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POW.TO - POWER CORPORATION


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Less than 11x earnings.

Pays 5% Dividend.

Less than Book Value

So what ValueInvestor? It's been trading as such for years! 

Well - their Fintech investments and sustainable energy have a lot of surprises, so much so that WealthSimple is now almost 18-22% of Power Corporation in 7 years! 

Bought a meaningful amount of calls, as it was mispriced. However thought I could share an idea that I think is so plain that many may miss it. 

Bet is do you think it will trade meaningfully less than book? Anyone who's in Canada knows that the new generation are not a fan of the big banks' brokerage, and rather trade with WealthSimple, as UX/UI is miles ahead. 

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I thought it was plainly obvious that POW was cheap five years ago, but their results have been chronically tepid and the stock has gone nowhere (I did, however, make a nice pile of beer money off the POW/PWF/GWO tender offers a couple of years ago).  As so often happens, it seems that in the Desmarais family, talent might have skipped a generation.

Turning to Weathsimple, how will POW shareholders ultimately receive cashflows from it?  That's the essence of true value generation.  Ultimately, shareholders need current or future cashflows to justify a higher value.  So, how will that play out with Wealthsimple?  As you noted, on paper, Wealthsimple is currently valued at $5 billion.  If POW chooses to not sell it, what earnings level will be ultimately be required from Wealthsimple to justify its current $5B paper valuation?  Maybe $300m or $400m annually (ie, at some point in the future it will be valued somewhere between 12.5x and 16.6x)? 

Wealthsimple does not charge fees or commissions for individual stocks but it does bend its customers over for F/X transactions, which is a good revenue stream in Canada because of heavy purchases of US stocks.  They charge fees of 50 bps or less for their automatic investment advisory service through which the buy a basket of ETFs for their customers.  They currently have 500,000 accounts for a total of ~$9.7B of assets under management and it's growing extremely rapidly, but for the life of me I can't see how they'd be earning much on that.  They can definitely add revenue streams which will help, but without actually having seen their financials, I'm guessing that they are nowhere near $300m or $400m annually and won't get there anytime soon.  With their current fee structure, would they require $100B of assets under management to generate $300m of net income (or would it require $200B to get there)?  That's a lot of kiddie accounts when they are currently averaging $19k/account.

My take is that the best thing that POW could do with Wealthsimple is try to offload it on one of Canada's big banks.  The big banks are all flush with capital because OSFI has refused to allow dividend increases out of concerns about the impact of covid.  Maybe POW could monetise Wealthsimple buy finding a sucker to buy it for more than $5B?  Certain Canadian banks are notorious for making poor acquisitions....

I could be missing something obvious on Wealthsimple, but as I said, I've been scratching my head a bit about its current valuation.

As for PowerCorp, at face value it's cheap for today's market.  It's selling for the same price that it sold for in 2007.  I think the divvy is sustainable, but I just don't see it growing rapidly.  Sometimes talent skips a generation.

 

SJ

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Posted (edited)

Valid Points. I just don't think the market is right in valuing Power Corp at the same valuation as 14 years ago, especially with WealthSimple. By the market's logic 14 years ago, Power Corp should be worth the same, but with an additional $4-5B for WealthSimple.

Secondly with WealthSimple, investors are not valuing it at cash-flow. Cash-flow now will be close to nil, but doesn't mean intrinsic value and know-how is not being generated. Plenty of investments with nil cash-flows but turned out stellar investments, such as Shopify, Tesla, Ballad Power (even with the 20% drop today and 60% from the highs), Enphase Energy etc. Not to say that this is a story stock, but to say that cash-flow needs to be generated now for it to be valued well when it's in growth mode - does not make sense. I think what's more telling is churn, expected ARPU and CLV/CAC, but that's hard to tell at the moment. 

Thirdly, Power Corp's management has fumbled for a long time, but are taking steps to close the discount-to-NAV gap. Constantly mentioning the roadmap, and taking actions such as the consolidation of Power Financial and Power Corporation. 

One can definitely do a lot of research on this, but I think it's simple.

1. WealthSimple is not going to be worth zero next year.

2. Power Corporation is not going to vanish with it's resilient and albeit slow growth businesses e.g. Great West Life, Canada Life, etc.

3. WealthSimple was worth only 1.4B in Oct 2020, and in less than a year it's worth $5B now.

Questions to ask:

1. What will WealthSimple be worth next year or even in a couple of months?

2. How is it going to factor in the pricing of shares?

3. What portfolio allocation makes sense here? For me it's a workout, and I don't need to think beyond that. 

If you know a company that's trading less than book, less than 10x earnings (hell, 50x earnings - maybe GoEasy?), has a grower that's cash-flow generator, but reinvesting all of it and more for sustainable growth - I'm all ears.

Until then, there's not much for this stock to rip higher, and if WealthSimple goes to zero today, you bought it at a price that brings you only a downside of 20% at most or rather less as they only invested $315M. Also the upside does not hinge on WealthSimple, there's KOHO Financial, Lion Electric (EV), and many other interesting investments. 

In other words, it's an investment that will track or exceed TSX index with a 5% dividend or will skyrocket. Would I put 99% of my net worth into it? No. However a 1-10% allocation, may make sense as an option. So yes, I think you're missing the obvious. As five years ago, I would've passed on Power Corporation for the very same reason that you stated. 😊

However, thank you for your post, if you think I've missed something let me know. 

Edited by valueinvestor
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Yes, it might be best if you view it as a mediocre investment (the POW stub) along with a lottery ticket (Wealthsimple).  As I suggested, my take is that Wealthsimple is currently overvalued at $5B, but that doesn't mean that it can't get even more overvalued (perhaps even insanely valued!).  Strange things happen when large numbers of investors pile into a stock.  E*Trade is probably a pretty poignant example of how something as mundane as a broker/investment firm's stock price can go parabolic when people happily pay higher prices for shares with no consideration of long-term profitability.  In the end, E*Trade is a good business with real profits and it has a value, just as Wealthsimple is a good business and will have real profits.  But, in the longer-term, there is a fair value to everything.

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Thanks for posting. I completely agree with your post, it's nice to have another angle at this name. 

Just to add to your rational - even if WealthSimple reverts to fair value, at the end of the day the stub price will not be affected theoretically (markets can overreact). Again they only invested $315M total, less than 1% of their market cap.

 

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Some thoughts: 

Power Corporation was and still is muddy with different layers, worthy of a Korean conglomerate. They did however take a step to clean up pre-Covid, which made headlines then but we mostly forgot. Previously, Power Corporations owned a portion of Power Financial which in turn owned partially IGM Financials + Great West Life + a legion of other names. All of which had a public stock that you could buy directly. The step they took last year was remove the Power Financial as a layer in between which help remove some "mud" and with it some of the discount.

But if you intend is to play the WealthSimple sum of the parts valuation, I think you might want to also consider buying IGM Financials instead of Power Corporations. WealthSimple resides within  IGM Financials, which in turn is controlled by Power Corporations. (62% owned)

This way you have "less mud" between yourself and the sum of the part thesis, but also less discount. All depends on what you want to do. Buying the leader of the pack, would give you more discount, but also mean that you are making a bet that the family will continue to work to shed the conglomerate discount.

 

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That’s definitely another way to play it. Since it’s a beer money investment, I thought I would go with Power. I was able to snag some Jan 2023 @ 40 calls for 0.50 each. Secondly I think lion electric can be another way to boost value. I don’t think the discount will narrow but rather the value of the business will increase more than what’s expected and even without  the narrowing of discount, share price will increase. 

Either way, we will be able to find out soon enough with this quarter’s earnings and the next raise sometime in the next couple of months. Nothing happens, one could exit quickly. 
 

 

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  • 2 weeks later...

"How the Desmarais empire mastered the delicate art of self-disruption"

https://financialpost.com/investing/how-the-desmarais-empire-mastered-the-delicate-art-of-self-disruption

Now this is something new, do you think more companies are going to self-disrupt? I never really thought of that as a business plan, it seems a fanciful way of saying self-destruction or in my world - cannibalism. 

This stock is a bit weird, on down days, but the options are still increasing in value. Not that it was down a lot, it increased 7% from the day of the post. This is a 5% dividend payer, probably would be up more if there was no dividend.

Lion Electric added 23 cents to NAV within a few days on $45 NAV. WealthSimple will probably be more valuable in six months. Yet if all the businesses go to zero, then it's only going to prick the busienss.

It's funnier when management is saying that they're goal is not to diversify but become a pure-play financial services business, and yet their actions say otherwise. 

Either way, it seems perfectly positioned to handle deflation or inflation, which is a key trend and the stock is reacting differently with more media attention.

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