March 8, 2008

Powerful Discount to Asset Value

I have talked about Power Financial Corp (PWF) and Power Corporation (POW) in the past. These are holding companies of a collection of assets that range from insurance companies to asset management firms among other sizable stakes in public traded companies. POW owns 66% of PWF, among other assets, which in turns owns significant portion of Great West Life Insurance, IGM Financials, and Pargesa Holdings.

Typically these companies trade at a discount to their Net Asset Value (NAV). These two companies are no exception they usually trade at a discount of 9% for PWF and 14% for POW. These discounts have almost doubled in this market. POW is trading at 30% discount to its NAV and PWF at 16%. See my calculation in table below.

Both companies have gotten a downgrade by RBC as well as the impact of a law suite against Great West Life, one of their major holdings. In addition, most of their assets are financial service companies, which is under great deal of uncertainty. I think if the gap widened because of these risk, then it is overdone. The law suite maximum payment to the plaintiff is reflected in the stock of Great West life. Also the assets held by their subsidiaries are away from most of the credit problems.

Notwithstanding all these risks, I think the discount to NAV is ridiculously high. POW gives you 3% dividend yield and huge cushion in term of compounded discounts on their holdings. However the only problem I have with investing in such an idea is that I have to analyze all the underlying assets and their risk profile, which can be a huge undertaking.

The idea is enticing as I have to think about it some more.

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