Just a quick blog post to update our Genworth Financial (ticker GNW) (SECs here) sum-of-the-parts valuation (SotP), in light of the fact that the company recently extended (yet again) the deadline for the China Oceanwide merger (this time, to March 15, 2019 - source here):
Although we sold out of our GNW position late last month at close to $5/share due to the upside being currently capped at $5.43/share...
...it remains firmly on our radar screen for a potential re-entry if the price and circumstances are right.
We last presented a GNW SotP calculation in early November 2018 in our Seeking Alpha article entitled "Genworth: Stakeholder Incentives And Facts On The Ground Point To Ultimate Approval Of China Oceanwide Merger". At the time, the SotP was $4.31B, or $8.58/share based on 502.6 million GNW shares outstanding.
Since then, the company announced its Q4 2018 financial results (see PR here), thus we have updated info to plug into the equations, as follows:
Genworth Sum-of-the-Parts Valuation (ex-L&A businesses) as of February 18, 2019 = $4.80B, or $9.58/share based on 500.8 million GNW shares outstanding, calculated as follows:
Value of GNW Canada equity @ 2/15/19 = 57.2% X C$3.75B X 0.76 f/x = $1.63B; plus
Value of GNW Australia equity @ 2/15/19 = 52.0% X A$1.05B X 0.71 f/x = $0.39B; plus
Value of U.S. M.I. @ 12/31/18 = 12X $490MM LTM Operating Income = $5.88B; minus
Estimated Net Holdco Debt @ 12/31/18 = $3.10B;
Equals Total of $4.80 billion.
(Source: GNW earnings releases and SEC filings; Yahoo! Finance)
Since early November 2018, the SotP has increased by exactly $1/share (or 11.7%) to $9.58/share, yet the stock currently trades for just $4.55/share--shockingly, down about 13% from the date immediately preceding the October 23, 2016 Oceanwide merger announcement--resulting in (theoretical, at least) upside of 110%(!):
The main driver of the recent increase in intrinsic value is the outstanding performance of GNW's U.S. Mortgage Insurance operations, which recorded $490MM of adjusted operating income in 2018, versus $311MM in 2017 (up 58% yoy). Even if one were to assign just a 10X multiple to USMI's adjusted operating income, the SotP would still be $7.63/share, far above the merger price. The main frustration/problem with any GNW SotP long thesis is, of course, the fact that GNW's board and management irrationally decided to give away all upside in excess of $5.43/share [which currently stands at ~$4/share, per the SotP above] to Oceanwide by agreeing to sell the company for that amount in cash.
What is even more frustrating for investors (such as us) on the outside looking in is that GNW's BoD/management have repeatedly extended the merger deadline without requiring Oceanwide to pay any kind of ticking fee to compensate GNW shareholders for the delay and the time value of having their funds locked up for such a long period with a capped $5.43 upside price. Of course, GNW's directors receive ever more directors' fees while they wait and GNW's CEO and upper management continue to collect their seven-figure salaries during the deal delays (it is actually convenient for these parties to drag out the process as long as possible, provided they face no challenge from an activist). Oceanwide gets a free call option on all of GNW's equity while they attempt to get their funds in order and the remaining regulatory merger approvals in hand. And the shareholders? Well, they get precisely squadoosh. Thanks a lot, CEO Tom McInerney...