Valuation: Undervalued

Investment Thesis:

Manulife provides financial, insurance and annuity products to their clients and consumers primarily in Canada, USA, and Asia
Manulife Financial ($MFC), had a 2020 revenue of $77.12B, a 2020 EBIT of 5.935B, and a market cap of $41.13B.
The potential upside for this investment would be between 16.9% and 61.31%, however my plan for this investment implies a total upside of 34.28%.
There is fundamental support at $19.72, $17.50, and $17.00

Company Overview:

Manulife Financial Corporation provides financial products and services in Canada, USA, Asia, and Internationally. There are 3 main segments to Manulife’s business model, Wealth/Asset Management, Insurance and Annuity Products, and Corporate/Other.

Furthermore, Manulife mainly operates in 3 countries, being Canada, USA, and Asia. On their financial reports and investor releases, Manulife splits the performance in each of these countries into segments. Furthermore, Manulife is listed on each of these countries stock markets under the tickers MFC.TO, MFC, and 0945.HK respectively.

Manulife’s Wealth and Asset Management segment provides their customers ETF’s and Mutual Funds, retirement and savings products, and asset management services (through their agents/brokers). This segment provides investment advice and solutions to all of their clients. The total profit for this segment is $1.1B, split into $344M (Asia), $363M (Canada), and $393M (USA). Lastly, Manulife’s EBITDA margin for this segment is 29.2%.

Manulife’s Insurance and Annuities segment offers deposit/credit products, life and long-term care insurance policies, and guaranteed annuity products.

Manulife’s corporate and other segment provides property and casualty insurance, and accident and health insurance. Manulife’s net income for this segment is $1.545B in 2020, with no information on their performance in each of their main countries.

Over the course of 2020 Manulife’s total revenue was $77.12B. This was split into the American division who made $23.36B ($CAD) in revenue, the Canadian division who made $18.64B in revenue, and their Asian division who made $28.46B in revenue. This leaves $6.6B in Manulife’s revenue being made by all of the other international divisions of their business.

Investment Information:

Financial Information:

Manulife Financial ($MFC), had a 2020 revenue of $77.12B, a 2020 EBIT of 5.935B, and a market cap of $41.13B.

86.36% of Manulife’s revenue comes from their Canadian, American, and Asian segments of their business.

For the DCF model, I used Manulife’s American tax rate as I was analyzing their stock on the American exchange. This tax rate was 21%, and is lower than the Canadian (26.5%), and the Asian (28%) tax rates.

Manulife’s WACC has been estimated by finbox.com to be 9.3%, and their EBIT has grown by a levelized CAGR of 15.99% over the past 4 years. Using previous EBIT growth rates to estimate Manulife’s future EBIT is logical due to Manulife being a mature company who makes a large portion of their revenue off of fees, which are based on their Assets under management (which usually grows steadily).

Competition:

Manulife’s main competitors are Prudential Financial ($PRU), Aflac Inc. ($AFL), Lincoln National Corp. ($LNC), Globe Life Inc. ($GL), and MetLife ($MET). All of these competitors are based out of USA and primarily operate in North America (similar to Manulife). Furthermore, all of these companies are public and are of similar market cap. which is beneficial for the comparable analysis later in this report.

General Information:

Manulife is a market leading financial services group.
Manulife’s Return-on-Equity (ROE) in 2020 was 11.6%
Manulife believes they will be able to accelerate growth in the upcoming year by focusing on growth opportunities in both Asia, and the Wealth/Asset management space.
Manulife has $754B in assets under their management (grew by 12% YoY).

Investment Valuation and Plan:

Valuation:

In order to value Manulife Financial, I built out a DCF as well as a comparable analysis that compares Manulife’s P/S, P/E and P/B to their competitors (listed above), to value them according to their competitors’ average.

DCF:

The DCF model that I built out estimates Manulife’s fair value per share to be at $24.71, which implies an upside of 16.93%. The information that I used to conduct this model can be found in the “financial information” portion of this report. To further validate this price estimate I decided to undergo a comparable analysis.

Comparable Analysis – P/S:

In this comparable I took the average (mean) P/S Ratio of Manulife and their competitors (which was 0.984) and divided it by Manulife’s P/S Ratio. By doing this, I found that in order to be valued at their competitor average, their share price would need to increase by 61.31%, which translates into a share price of $34.21. This value seemed quite high, so I decided to compare their P/E to their competitors.

Comparable Analysis – P/E:

This comparable was performed the same way in which I performed the P/S comparable. This comparable resulted in an estimated fair value of $31.02/share, which implies a share price increase of 46.76%. Once again, this seems quite high, so I decided to compare their P/B ratios to see if this valuation was consistent across the board.

Comparable Analysis – P/B:

This comparable was performed in the same manner as the P/S comparable. In this comparable, the estimated fair value per share is $17.00, which implies a decrease in share price by 19.57%. This is simply because Manulife s P/B Ratio has stayed relatively consistent over the past 2 years, while some of their competitors had a historically low P/B value that is now starting to rise back to previous levels.

Plan:

Any entrance into a position in Manulife Financial ($MFC) between the $21-$22 range is a strong buy that limits the downside risk of the investment.

If the stock hits anywhere near the $26.74, I would sell half of the position and hold the rest of the position until the price reaches $31 and at that point, I would sell the rest of the position.

Alternatively, if the stock price falls after an entrance at $21-22, I would sell my position if the price falls below $19.62 and look for a re-entry between $17.00-17.55. This plan would help to limit the risk if the share price starts to fall and ensure a great risk to reward ratio upon re-entry.

Risks:

Any negative news that would make the share price decrease.
- We already have a plan for if this happens and would re-enter at $17-17.55.
If the stock market starts to slide, then Manulife might experience a bad earnings report or two that could hurt the share price in the short term.
- This is because Manulife brings in a lot of revenue from their Assets under Management (AUM), and a crash/correction would decrease their AUM therefore decreasing their revenue from fees.

Catalysts:

Any Upgrades in the stock/sector by other financial institutions may help the share price in the short-term.
Future Earnings reports
- They just reported earnings last week, and it increased their share price by 2%.