Friday, June 30, 2006

Scotia Capital Upgrades Power Financial

Scotia Capital, 30 June 2006

Attractive Valuation

• We are upgrading Power Financial Corporation to a 1-Sector Outperform from 2-Sector Perform based on share price weakness, attractive valuation and expected higher earnings growth.
• PWF's share price has trended sideways for nearly two years, with earnings and dividend growth of 16% and 23%, respectively over this period.
• The last time PWF experienced such a significant period of share price weakness was from February 2001 to October 2002, immediately following Investor Group's January 2001 acquisition of Mackenzie Financial.
• PWF's valuation is attractive at 11.1x 2007E earnings versus the bank group at 11.4x. PWF's trailing P/E multiple has contracted from 15.8x to 13.4x, and its multiple point premium to the banks has declined from 1.9x to 0.3x.
• PWF's discount to NAV has increased to 11.6%, more in line with the historical mean of 14% after trading at no discount in 2004 and early 2005.
• PWF's two major subsidiaries represent excellent value, with GWO share price near its 52-week low with earnings reacceleration expected (Exhibits 10, 11) to build into 2007, and IGM share price correction of 17% from its recent highs.
• We expect strong share price performance from PWF over the next few years, driven by earnings growth rebound expected in 2007 (Exhibit 8), low valuation (Exhibit 5) and defensive characteristics (beta of 0.41).

GWO Earnings Momentum / Attractive Valuation

• Scotia Capital Insurance Analyst Tom MacKinnon upgraded PWF subsidiary GWO to 1-Sector Outperform on February 17, 2006.
• We are anticipating an acceleration of GWO's earnings growth, with year over year earnings expected (Tom MacKinnon) to be up 2% in Q2/06, 6% in Q3/06, 10% in Q4/06, and 14% in 2007, expected to be the highest of the insurance group. GWO's recent earnings have been negatively impacted by the appreciation of the Canadian dollar. GWO represents 71% of PWF's NAV and for every 10% increase in GWO share price, PWF's NAV increases 7.1%.
• GWO has a high 3.2% dividend yield, versus Manulife at 2.0% and Sun Life at 2.5%, and is currently trading at 11.7x 2007E earnings, versus Manulife at 12.7x and Sun Life at 11.3x.

GWO, IGM, Pargesa Share Prices all Down

• PWF's main holdings have all experienced share price weakness over the past year or so. GWO has trended sideways since February 2005, and IGM's share price has corrected 17% from its 52-week high. Pargesa remains the most resilient of PWF's subsidiaries, down only 8% from its 52-week high as several holdings have remained strong. Pargesa subsidiary GBL recently announced an agreement to sell its stake in Bertelsmann.


• Our 2006 and 2007 earnings estimates are unchanged at $2.50 and $2.85 per share, respectively. Our 12 month share price target is unchanged at $38 based on 13.3x our 2007 earnings estimate and 12% discount to our target NAV of $43 per share. GWO and IGM 12 month share price targets are $33 and $58, respectively.
• Upgrading to 1-Sector Outperform from 2-Sector Perform.