Power Corporation of Canada

Power Corporation of Canada (TSX: POW) is a diversified holding company and has interests in financial services, communications, and other business sectors through its controlling interests in Power Financial. Power Financial in turn, holds controlling interests in Great-West Lifeco, IGM Financial, and Pargesa.

Recent Update:

• The company would disclose its third-quarter results on November 11, 2020.
• Recently, Lion Electronic (in which one of the group’s subsidiary has majority stake) reported that it would manufacture ten battery electric trucks for Amazon, and the first two will be delivered this year.

Q2FY20 Financial Highlights: POW announced its second quarter results, wherein the company reported net earnings of CAD 666 million, as compared to CAD 278 million in the previous corresponding period (pcp). The increase was majorly driven by higher contribution from the company’s subsidiary Lifeco due to increase in market-related recoveries, actuarial assumption changes and management actions, and a recovery on the deconsolidation of IntegraMed America, Inc. The company’s net earnings per share stood at CAD 0.99, higher than CAD 0.64 per share in Q2FY19. However, a lower contribution from Pargesa and other investments remained a drag. The company subsidiary IGM Financials reported AUM of CAD 165.4 billion, up 12.1% from the previous quarter. Lifeco's consolidated assets under administration stood at CAD 1.7 trillion at the end of the second quarter of FY20, reflecting a 9.1% increase from Q1FY20, underpinned by the market recovery.

Q2FY20 Net Earnings Contributions (Source: Company Reports)

Risks: Majority of the company’s business is correlated to the Global Equity markets, and higher volatility would lead to a higher redemption rate which would have a negative impact on the total AUM of the company.

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The group delivered a decent quarterly result on the back of solid performance from the companies’ in which the group has an investment. The group has a strong balance sheet and resilient business model, leading market positions, and extending and enhancing client engagement in a challenging environment. The Company’s liquidity requirements are majorly self-funded through internal accruals and have abrupt liquidity to fund its working capital requirements. Lifeco recently announced the acquisition of Personal Capital Corporation from, which provides a hybrid wealth management services coupled with a leading-edge digital experience with personalized advice delivered by human advisors. The above addition would enhance the company’s growth prospects. Further, the group has a proven track record of dividend payment over the past 10-years, which is a key positive from an income investor’s point of view. At the last traded price, the stock was offering a dividend yield of 6.65%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to Book based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like AGF Management Ltd, Genworth MI Canada Inc etc. Hence, considering the aforesaid facts, current price movements, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 26.91 on October 15, 2020.

POW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Fairfax Financial Holdings Limited

Fairfax Financial Holdings Limited (TSX: FFH) is a holding company which is engaged in property and casualty insurance and reinsurance and the associated investment management.

Recent Development

On October 05, 2020, the company reported the appointment of David Johnston as a director of Fairfax. Mr. Johnston has held a number of distinguished management and leadership positions in academia and government, including acting as the 28th Governor General of Canada from 2010 to 2017.

Q2FY20 Financial Highlights: Fairfax reported an impressive top line growth but failed to retain the momentum in its bottom-line. The company posted gross premium written of USD 4,702.7 million, higher than USD 4,335 million in the previous corresponding period (pcp), due to a higher net premium earned from Northbridge and Odyssey Group and Allied World segments. Net premiums written by the insurance and reinsurance operations increased by 5.4% to USD 3,555.5 million from USD 3,354.3 million.

Source: Company Filing

Operating income stood at USD 120.5 million, significantly lower than USD 330.0 million reported in the second quarter, due to COVID-19 losses of USD 308.1 million.

Interest expense stood at USD 122.2 million, which includes USD 74.4 million incurred on borrowings by the holding Company and the insurance and reinsurance companies and CAD 31.5 million incurred on borrowings by the non-insurance companies.

The quarter was marked by higher loses on claims, a slightly higher operating costs and commissions. The company reported net earnings at USD 426.3 million, as compared to USD 579.5 million in pcp.

The consolidated combined ratio of the insurance and reinsurance operations was 100.4%, producing an underwriting loss of USD 13.3 million, compared to a combined ratio of 96.8% and an underwriting profit of USD 101.0 million in 2019, primarily reflecting COVID-19 impact and higher current period catastrophe losses, partially offset by growth in net premiums earned and higher net favorable prior year reserve development.

Risks: Occurrence of catastrophic events with a frequency or severity exceeding the group’s estimates; changes in market variables, including interest rates, foreign exchange rates, equity prices and credit spreads could negatively affect the group’s investment portfolio. Further, the group is exposed to the risks associated with the global pandemic caused by COVID-19, and the related global reduction in commerce and substantial downturns in stock markets worldwide, the cycles of the insurance market and general economic conditions.

Valuation Methodology: P/BV Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the second quarter of FY20, FFH reported a solid improvement in the gross and net premium written. Core underwriting performance continues to be very strong with a combined ratio excluding COVID-19 losses of 91.2%, continued favorable reserve development and growth in gross premiums written of 8.4%, and operating income was USD 120.5 million despite the COVID-19 losses.

The group remain focused on continuing to be soundly financed and ended the quarter with approximately USD 1.9 billion in cash and investments in the holding company. Further, the company is offering a decent dividend yield of 3.38%., which is relatively higher, given the lower interest rate scenario.

Therefore, based on the above rationale and valuation done, we have given a “Buy” recommendation, at the closing price of CAD 385.45 on October 15, 2020. We have considered Hartford Financial Services Group Inc, American International Group Inc and Power Corporation of Canada etc., as a peer group for the comparison purpose.

FFH daily technical chart. Source: Refinitiv (Thomson Reuters)

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