Topic: Growth Stocks

Genworth MI Canada awaits outcome of Chinese takeover bid

Genworth MI Canada

Recently a Member of Pat McKeough’s Inner Circle asked his opinion of Canada’s second largest default mortgage insurer.

Overall, says Pat, the company’s fundamentals are sound. With its shares trading at just 8.5 times forecast earnings and a high dividend yield, it looks like an attractive value stock. Still, the stock faces uncertainty over the parent company’s takeover and the possibility of a slower housing market in Canada.

Q: Pat: What is your opinion on Genworth MI Canada Inc.? Thank you.

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A: GENWORTH MI CANADA, $57.11, symbol MIC on Toronto, is the second-largest Canadian mortgage insurer. It provides this service through its subsidiary, Genworth Financial Mortgage Insurance Company of Canada.

Genworth’s U.S. parent, Genworth Financial (symbol GNW on New York) owns 57% of Genworth MI Canada and is now the subject of a takeover bid by China Oceanwide Holdings Group Co., Ltd. Oceanwide is the privately held, family-owned, international financial holding group founded by Lu Zhiqiang.

On July 2, 2019, Genworth Financial announced that due to delays by Canadian regulators in approving its sale to Oceanwide, it may be forced to consider selling its interest in its Canadian mortgage insurance business.

The discussions with Canadian regulators have been ongoing since 2016. Selling its majority stake in Genworth MI would eliminate the need for Canadian regulatory approval of the Oceanwide transaction.

The holdup has revolved around data protection issues that would arise if the Chinese company acquires Genworth’s Canadian arm.

As a result of the delays, Genworth and Oceanside have extended the merger deadline by five months to November 30, 2019.

In the three months ended March 31, 2019, Genworth MI Canada’s revenue was $169.0 million, down 1.2% from $171.0 million a year earlier. Excluding one-time items, the company made $118.7 million, or $1.35 a share, in the latest quarter. That was down 0.8% from $119.6 million, or $1.31. The year-ago results benefited from higher mortgage insurance volumes associated with increased demand ahead of regulatory changes.

Growth stocks: Tighter mortgage standards could make markets vulnerable

Genworth MI’s fundamentals are sound. It also aims to conservatively manage both its credit risk and its investment portfolio. Still, to report improved results, it needs Canadian housing markets to remain relatively stable.

Those markets could become sluggish this year, given tighter mortgage qualification standards introduced by the Canadian government. As well,Canadian households on average are highly indebted and interest rates continue to rise. However, steady economic growth, employment and immigration should help offset that.

Genworth MI stock trades at 8.5 times the company’s forecast 2019 earnings of $5.25 a share. The company’s shares yield 3.6%. These numbers are attractive from a value-investing standpoint, but they reflect the uncertainty associated with the U.S. parent’s pending takeover and what it will do with its Canadian subsidiary—as well as the possibility of a slower housing market.

OUR RECOMMENDATION: Genworth MI Canada is okay to hold, but only for aggressive investors.

For our recent report on a Canadian growth stock facing stiff competition, read Online retailers not allowing this stock a good night’s sleep.

For our views on how to focus on stocks with real growth in store, read 23 top tips for successfully investing in TSX growth stocks.


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