petec

Bear in mind the unpaid dividends would accumulate on the BS and impair the value of the common. At some point there’d be significant pressure to pay, if things go well. And if they don’t both classes are f***ed anyway. I do agree however that there is a risk, however small - they clearly and rightly prioritise the common over the prefs. I seem to remember the prefs have votes under some circumstances. That may include when they’re not being paid. Don’t imagine it’s enough to wrest control from the Goodmans though. My bigger objection to your theory is: why bother? The convertible series was a real problem for liquidity. The remaining dividends aren’t. It would wreck their last shred of credibility for no benefit. Still, interesting thought & discussion.

I find it unlikely they’ll suspend the dividends on the prefs. I’m not sure the savings would be worth the ensuing noise, possible legal challenges, etc. By your thinking it’s arguably logical for every pref issuer to suspend dividends, but they don’t because there are hidden costs. By contrast there was logic in the conversion, which I regard as a good decision and one I would have taken. I’d rather own the prefs, but I can’t. I have a smallish position in the common where I quite like the value. If it drops substantially from here I’ll likely add.

I suspect your inner pessimist has the edge. That said I’m looking forward to adding next week at bargain levels.

I think the days when anyone thought Prem was a messiah are long gone, and the idea that anyone on here tries to justify every action is laughable - the amount of criticism and invective over the last 5-odd years has been immense. The question is whether it is overdone, which it might be for two related reasons: 1) despite the clear failures on the investing side Prem has put together an impressive set of assets and people, and 2) people and organisations learn, and this one is clearly changing. Therein may lie the opportunity, for a value investor. We will find out. BTW anyone who thinks of the 15% target as a promise is a moron. Would you mind elaborating on your thesis for Thomas Cook? Obviously its been a home run, but only (it seems to me) because of Quess. Within the legacy business as far as I can tell profits on the forex side have collapsed and pricing on the travel side have been squeezed by OTAs. I like the various deals (Kuoni etc), but from what I see FCF hasn't grown since Fairfax bought it. However I have only glanced at it so I could be wrong on all of the above. Please correct me if so.

My answer would be helping them purchase shares in the market, which Fairfax does a lot of (see annual letters). As I say I have no issue with awards, but I’d like to know more about the conditions and likely rate. No issuances do not dilute Prem’s votes.

Some thoughts on the share issuance discussion. I think the split between shares bought for treasury and for cancellation is a bit of a red herring. If they like the price now, it makes all the sense in the world to stock up on shares for future issuance under stock award schemes. The fact that they are buying them doesn't mean they will reissue them any time soon - on the 1q18 call Prem said the new share award plans vested in 15 years, and presumably the awards are somewhat performance based so they not be reissued at all. In 2018 90k shares were reissued, or about 0.33% of the outstanding. More important is the number of dilutive shares. This number went from 0.69m shares to 0.89m over the course of 2018, up 200k. On the YE18 base, that would imply growth in the share count of 0.7% a year, which I wouldn't have a problem with. But the number of dilutive shares rose another 170k in 1q19 alone. If that pace is maintained then the share count is growing at about 2.4% a year, although as discussed above it may be many years before the dilutive shares are actually issued. I can deal with a relatively high pace of issuance at the moment: a new generation is rising through the ranks, as we saw in the reorganisation at Hamblin Watsa last year, and I want them incentivised. But the 1q19 pace of dilution eats about 2/3rds of the 1m/year buyback they spoke of on the 1q call. That strikes me as too high unless performance improves a lot. As an aside, the fact that the number of dilutive securities is growing at that speed when the share price isn't rising makes me wonder how demanding the performance targets are. Finally, it really annoys me that they calculate BVPS using basic shares.

I’m confused by the AGT transaction. Have they lent money to management for an MBO, or bought it themselves, or both?

I have been a FFH shareholder for longer than some of you may have been alive! I suffered the seven lean years and hoped for seven prosperous ones before Prem put on the hedges during one of the longest bull runs in our lifetimes. But facts are facts. At the close of 1998 the book value of FFH was $112.49, rising to $432.46 by the end of 2018. This represents a growth rate of less than 7% for the past twenty years. You can add on a bit for the dividend but it still represents a rather disappointing performance. Prem is quick to mention the results since inception but frankly the last 20 years have been lackluster and I am seriously questioning the performance we can expect going forward. I’m halfway through my annual deep dive. Full disclosure: I’ve always liked this company so maybe I’m biased. But the more I read the more I like. Most of the major investments look good, some great, to me, with considerable value on the table. The amount going on under the bonnet is quite incredible and Fairfax has the opportunity to build several major businesses from scratch. This is a very different business to 20 years ago: Fairfax have worked themselves into a position where they can put incredible people in charge of operations and drive change. Putting info together from various sources I’m not worried about the stock buybacks for treasury - I think the buyback is real. And they’ve sworn off naked hedging. Lots to like, especially with markets where they are.

Feels like vintage Buffett to me! 8% on 10bn for a decade (or more) with an 11y (or more) warrant at (more or less) the current stock price. Incredible. Only question I have is what the conditions are under which the pref could be repaid before 10 years are up.

Brief update on Resolute, which has slowly been sorting out its balance sheet: FY18 ebitda: $570m. FY18 FCF: $280m. YE18 net debt: $340m. Market cap: $700m. FY19/20 consensus ebitda: $400m (ev/ebitda: 2.5x). FY19/20 consensus FCF: $170m (FCF yield: 24%). The glitch is that the pension liability is $1.25bn - if you include that the forecasted ev/ebitda is 5.5x. Horrible industry and consensus is clearly forecasting that 2018's operating performance can't be sustained, but it feels like last year's $136m special dividend might not be a one-off. Fairfax owns an eyewatering 33.5%, worth $240m, and their share of the special was $45m.

Certainly they ought to be able to do mid single digits. But it's not like there's no downside risk. A 10% equity loss would wipe out a 4% fixed income gain, roughly. And position sizes are big - if Eurobank, Seaspan, and Blackberry all go to the wall, you'll know about it. Thankfully there's little risk of that in my view ;)

No, it's directionally right, and in-line with their guidance that a 95% combined ratio and a 7% investment return gives 15% book value growth after debt costs, taxes, etc. The issue is that if you assume the investment book is 70/30 debt/equity, and you assume a 4% return on debt, you've got to have a 14% return on the equity investments to get to 7% overall. That's not pie in the sky but nor is it easy. That's why they're trying to be smart about debt+warrant deals, to juice the returns on the debt side.

I think the answer to that is you can, but the parent has advantaged access to new investments in some cases. You couldn't for example, have got the SSW deal in the market. Over time that advantage may add up. What drives your confidence in the timeframe of the return in Fairfax India? I don't dispute its potential but I have no idea when it will be realised. Do you?

So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on). Pete I’m really surprise that you think FFH will probably not achieve 7% investment returns. Long term it’s less than a S&P500 index. I’m more septic about 95% CR when the loss from catastrophes are include That's 7% across the whole portfolio, ~70% of which has to be invested in fixed income for regulatory reasons (quite rightly). 7% was very doable when treasuries yielded 5%. Much harder now - the extra work the equities have to do is far greater. As far as I know, they aren't required to have 70% in fixed income for regulatory reasons...where did you get that from? I think they could do 7% no problem long-term, as long as Brian Bradstreet is also there. They will have to find someone as gifted as Brian to join Hamblin-Watsa. I don't think they can rely on the young guys they have there already, because it's not something you just can learn...like picking equities, there is an art to fixed income as well. Brian is one of the best...Francis is damn good...but I don't know how much depth there is at Hamblin-Watsa on the fixed income side. It's a project they need to work on over the next 2-3 years. Find that guy! Cheers! I phrased that badly. What I meant was: they have to have a lot in fixed income for regulatory reasons and generally the weighting has been around 70%. In fact I think it's probably more like 75% on average - off the top of my head I can't recall a time when they had >30% in equities although I may be wrong. I don't ever expect them to have much more than their own book value invested in equities and I don't get the impression they feel they can add much equity exposure from today's starting point. I draw that assumption from various sources. Anyway the core point is that the S&P is not a fair benchmark for the entire portfolio, as was implied by the post I was replying to. I think they might do 7%, but with fixed income priced where it is I'm happier with an assumption of 5% or 6%. However the float leverage means that even with the portfolio performing below the S&P, BV growth could beat it. And I think the debt+warrant deals are a very smart way to juice returns in a low rates environment - I hope to see more of them. Totally agree that the fixed income bench is opaque and replacing Bradstreet is a huge project. Frankly it worries me if you don't know who's behind him in the queue - I thought you knew everything ;)

So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on). Pete I’m really surprise that you think FFH will probably not achieve 7% investment returns. Long term it’s less than a S&P500 index. I’m more septic about 95% CR when the loss from catastrophes are include That's 7% across the whole portfolio, ~70% of which has to be invested in fixed income for regulatory reasons (quite rightly). 7% was very doable when treasuries yielded 5%. Much harder now - the extra work the equities have to do is far greater.

By my maths the top 4 positions are now: $1bn Eurobank/Grivalia, which could have a long way yet to run. $930m Blackberry (including the convertible at par) which seems to be gaining operating momentum. $820m Seaspan (not including $500m of debt, but including the profit on the exercise of the third tranche of options, which are in the money). $700m ICICI Lombard which has had a terrific run and which I suspect they might sell.

@Spek my understanding is that the share issuances relate to the management restructuring - as you know there's been a huge shift in who manages what and in effect they wanted the new movers and shakers to have more equity. What annoys me is that they haven't given any detail around whether this might continue, whether there was a performance-based element, whether those employees have committed to buying shares in the market with salary, etc. Actually it doesn't just annoy me, it staggers me.

Modi, I would imagine.

This is a personal view, but the 15% is now being expressed as 95% CR and 7% return on investments. I see no issue in targeting those metrics over the long term. What they've achieved in the past doesn't have to be a guide to what they aspire to in the future, especially when they've sworn not to repeat the biggest mistake of all (the huge naked hedge). That said, I couldn't care less that they target 15% and I find it surprising that people on here focus so hard on it. That's not a criticism, it's just that I have never had the sense that they manage towards the 15% goal in a bad way. Their mistakes are plenty, but they are so long term in approach that personally I don't think the mistakes stem from stretching to get to 15% - and that's the main negative of having a public goal. So I just ignore it, and focus on whether I think 95% and 7% are achievable (probably and probably not, respectively) and whether I'd be happy owning Fairfax at the current price if the ROE was say 10% over the long haul (yes with bells on).

An accounting question... Blue Goose is consolidated (Dundee own 89%). It has external debt but it also has $29m of intercompany liabilities that reduce minority equity. I assume this includes the $15m convertible debenture that Dundee owns. Does anyone know what the rest is? Also how are the intercompany liability and the $15m convertible pref accounted for at Dundee? Are they eliminated as an intercompany asset? (They're not in private debt - that's $25m, split $15m Eight Capital and $10m Parq). NB BG is on Dundee's books for $27m, just below the value of the intercompany asset/liability. I'm mainly asking because I don't want to double count, but it's also interesting to think about sale scenarios. The good thing is BG doesn't have to have equity value for Dundee to get some cash back. The bad thing is if Dundee only sell the equity, and there's no concurrent refinancing, they may be stuck with the debt.

I do - thanks.

Just updating my NAVPS. As a common holder I love the conversion of the prefs - materially reduces risk while still leaving multibagger potential (although that's increasingly dependant on UHIC). My NAVPS for the common now ranges between $0.90 and $7, so I quite like the risk/reward. The $0.90 assumes virtually all the investments bar DPM are a 0, but does value the prefs at market not par - in other words it basically assumes they sell DPM and buy back the prefs, or swap DPM for prefs at market. The $7 is mainly driven by current BV less TauRx plus something for Parq, with the big driver being UHIC finding oil and the probability assumptions in that DCF going to 100%. I am intrigued by Parq - they have written off the entire equity and pref equity position, and a third of their (small) debt position. Downside risk is very limited here unless they pour more capital in. But when I play around with scenarios based on ebitda, refinancing rates, and FFO cap rates it wouldn't surprise me if there is some value in the prefs at least. And just about the only good thing about this investment is that Dundee has moved further up the cap structure with every additional investment so they get more of any upside than the other owners do. Question: has anyone seen a call transcript?

I fear so.

That's way above my pay grade! That said, I've read some quite good critiques of the models used to predict disaster, and one of the ex-governors of the BoE is very vocal that it won't make a huge difference. I read that the UK has grown (marginally) faster than Germany since the vote, which I find remarkable, and unemployment is at its lowest since 1971. So my instinct is that the risks are being exaggerated and that a recession of GFC severity is unlikely. The far bigger issue is whether someone with a brain is Prime Minister, or Jeremy Corbyn. If it's the latter we're going to hell in a handbasket regardless of what happens with Brexit. Bear in mind the FTSE100 (if that's what you're looking at) has a lot of foreign & commodity earnings in it so it's not the best gauge of how investors view Britain.

The Brits have the right to determine their own destiny and leave the EU, if they so desire. However, it appears to me that the political system in the UK is not able to make a positive decision on how to do it. It is also noticeable that all the pro- Brexiter (Boris Johnson) are all gone and let May deal with how to get the job done. It looks to me like the EU has done their part, but the politicians and in the UK haven’t done theirs. I think the EU should should not let it default into a hard exit make the rules as far as it pertains to EU sovereignty as they please and let the U.K. figure out things as they go. EU is much larger than UK, so the fallout will hit the UK much much harder than the EU. Sorry lads, but bad things can happen when you let idiots run your country. The political system is quite capable of making the decision. It just might take an election first. We have a Remain parliament trying to implement a Leave vote. It may take an election to either confirm the public does not want a WTO Brexit, or to replace the members of Parliament so that it gets one. The Brexiters like BoJo are far from gone. They resigned from government when May refused to implement the Brexit they wanted, but they are still heavily involved and BoJo is a leading candidate for the next leader of the party. I think the EU has been a bit shortsighted. They insisted we negotiate the divorce settlement first and the future relationship later, with the result that Parliament won’t back the deal because they don’t know what the future holds. That wasn’t smart. Varoufakis has described the deal as something a country would only sign if it had been defeated at war. If that’s even half accurate then they’ve overplayed their hand and raised the risk of a no deal Brexit. Will it hurt the UK more than the EU? Of course, to start with. But if we are smart enough to cut corporate tax to 10%, tariffs to zero, deregulate, sign a trade deal with the US, and join the CPTPP - all of which are quite possible - then who knows? Certainly beating the EU’s lacklustre economic performance shouldn’t be hard. I’m coming across as a diehard leaver. In fact I voted to remain. But I do believe we need to respect the vote.