petec

Finally finished my review of Fairfax Africa, or rather Helios Fairfax Partners. All feedback welcome. I have tried contacting IR to clarify a few things, but no response - they could REALLY do a better job communicating. But it's cheap, and has optionaity.

Hi all. Finally finished my review of Fairfax Africa. It's not material for FFH now, but you might be interested.

Yes. It is a bank. In Greece. That doesn't mean it can't compound nicely from here. But should it trade at much higher multiples? No.

I owned KW briefly before the takeover. I think there is plenty of hidden value. The share price didn't reflect this for 3 reasons: KW screens highly levered, which puts people off; real estate is relatively unpopular today; and real estate is in a downcycle because interest rate increases lead rent increases. However, on the other side of the coin, rents are starting to accelerate, interest rate increases have or will level off, and new supply is at cyclical lows. I think FFH have timed this one quite well. When I owned it I ran simple valuation scenarios that came out between $12 and $28. Fairfax bought for £10.90. I am pretty confident they will get a decent result from this deal and that's before considering that the asset management business might grow and FFH might benefit from having real estate expertise in-house.

It does make me smile to see investments like Stelco and Seaspan described as high-quality. At the time, IIRC, this board was screaming that they were absolute crap. There is an element of hindsight bias here. In addition, Fairfax were brilliant investors from formation until 2008 or so. Then they had a bad decade. If that's changed, it's less "new Fairfax" and more "back to old Fairfax". One of my concerns with the business is that the portfolio built in the 2010s (Eurobank, Seaspan, etc.) has mostly hit fair value. There is a great tendency to look at old investments because we have more data, but the answers are already fairly settled; really we should be mapping out the future of investments where we don't know the outcome, like KW, Sleep, Blizzard, etc.

Same! Happy memories.

In response: The real estate portfolio and inventory are largely required to run the business - anything that can't be sold can't be valued separately. There are zero meaningful synergies with Recipe/Keg. Peller already has significant distribution as described in the deck. Long term business - yes - but not a very good one. I used to know Concha y Toro in Chile quite well. I came to the conclusion that it is all but impossible to build real brand equity in mass consumption wine. Producers are much better at making taste consistent across vintages than they used to be, but there is immense competition. The best producers can do is earn a commoditised spread between input costs and sales price. That fluctuates from year to year but is fairly stable over time. Concha earned 5-12% ROIC over the 10 years I modelled it, averaging 7-8%. Sector is out of favour - is it? They're paying 11x ebitda* for a glorified farming business in an industry that hasn't grown volumes over the last 25 years. * $579m EV from the release divided by $50m L5Y average ebitda from the deck. I can't see the value here. I hope Fairfax has an angle! If they were buying a decent Burgundy producer at least I might be excited by shareholder discounts at the AGM!

It would likely depend on the rating of the convert, but in theory yes. But most insurance companies don't have this kind of in-house investing expertise, and don't want to build it.

I think you saw this with the Blizzard investment. Recall that was almost entirely debt, mostly secured on real estate, with laddered interest rates depending on the seniority. There was an equity sliver, but so little that it was really an option. This way, they used their regulated float to finance the acquisition, raising their average interest rate compared with investing treasuries, and also kept the equity upside. It's great, but limited: it is higher risk than investing in treasuries and they can't do it will all their float.

The real reason rising interest rates and a falling stock price are a headwind to book value is they both mean more buybacks at a slight premium to book Long may it last.

I was wondering what the "site build homebuilding operations" were. I'd forgotten about Summit. You think it's the input suppliers as well? Is that right? Plus maybe Berkshire Home Services, but presumably not the main bit of Clayton Homes? Strikes me this is also a pretty fragmented sector where they could bolt on additional acquisitions fairly easily. More importantly it does make me think Abel is going to be more flexible and creative in deploying capital, which is good.

A minor negative on the Kennedy Wilson transaction - KW has sold $1.8bn of bonds in the low 7% range to repay bonds in the high 4% range. I can't imagine why they would do this unless there are change of control provisions in the existing bonds. Anyway, interest costs go up on what is already a very levered business. Kennedy Wilson Announces Pricing of $1.8 Billion Senior Notes Offering | Kennedy Wilson

Not the only reason. Low rates was also key. The float-levered-investing model is very sensitive to rates and so are underwriting profits. I'd say both were below midcycle levels for most of 2010-2020.

Exalted company indeed. Please remember I spent most of the 2010's adding and getting nowhere. I am deeply fallible

Just the one? Amateur