petec

It might have touched 4.44 but it's retraced to 4.20 now.

My notes on the recent CIG deal, if anyone's interested: FAH agreed to recap CIG in 2018/2019 in three stages: a $21m loan (2.5% fee, prime+4%, 1 year), $51m in a rights issue at R4/sh (underwritten by FAH for 2.5% fee. Uptake was only 10.5% because the share price was below the offer price, so FAH got most of the shares which I imagine was the intention), and then conversion of the loan into equity at R5.20. After the conversion FAH will have 56% of the stock at an average price of R4.14. As of Feb 2019 CIG trades at R3.10 but the company's own SOTP (p17 here: http://www.ciglimited.co.za/wp-content/uploads/2018/08/Project-Wakanda-Shareholder-meeting-re-convert_13August2018_vF.pdf), which looks reasonably conservative at first glance, says it's worth R7.10. CIG is a pan-African diversified energy infrastructure holding company exposed to growing investment in power generation & grids etc. The problem is that the construction arm got into classic construction trouble with cost overruns etc. This caused the holdco to breach covenants on its long term debt, triggering a holders call clause and the need for a rights issue. There seems to be value in the other subsidiaries, so with a better debt structure this opportunity might never have arisen. The major assets are Conco and Conlog. Conco builds substations and high voltage electrification projects including wind parks and solar farms across Africa and the Middle East. This is the business that got the holdco into trouble. It has been restructured and reorganised to improve execution and project selection, management have been given CFops incentives for the next 3 years, and CIG believes it will return to profitability over the next 12-18 months. Conlog makes prepaid and smart electric meters. These can be sold or leased or bundled as a service (e.g. revenue management and load management for utilities and municipalities). Conlog will receive an equity injection to accelerate the buildout of the lease/service annuity streams at an anticipated 20-25% ROE. Other assets include AES (Angola Environmental Services - does waste disposal for the oil and gas industry in Angola, debt free), CIGenCo (develops mid-sized generation projects, made its first profit in 2018, targets a 20-25% ROE, and has 6 out of 14 projects coming online soon), CPM (maintains renewables and transmission sites), Tractionel (electrifies railways), and CBM (Consolidated Building Materials, consisting of Drift Supersand which mines aggregates and West End Claybrick which manufactures clay bricks and concrete roof tiles). A number of these businesses are currently depressed either due to the oil price (Angola rig count is at historic lows) or the South African economy (construction has been in a recession for some time). In summary FAH seem to have got reasonable value, there's a clear reason why that opportunity existed, and there's a decent platform for future growth.

IIFL down 60% over 6 months to below 10x forward earnings. Anyone following it? I know there were liquidity concerns last year but I thought they’d passed.

There’s a lot of good info on CIG on their website. Only glitch I can see is investors didn’t exercise their rights, but it would have been a non-event/disappointing for FAH if they had. At first glance FAH have bought half the company at a big discount to book, and it was healthily profitable before one of the divisions got into trouble. Edit: not such a big discount to book; didn’t see how much they lost in 2018!

I think you meant this link: http://grocapitalholdings.com/ By the looks of it it might have been part of AFGRI, which might be why you don't know of it separately. It's the holding company for the South African Bank of Athens, bought from National Bank of Greece last year.

Yes, but that's at least partly political given slow NGTL expansion approvals etc. Thanks for the input.

Ha - I assume that's more a personal wish list than a probable reality? ;)

I am new to Alberta politics and hoping some of you can help me out. There's an election soon and the Conservatives are in the lead from the polls I have seen. Implications? I am specifically coming at this from a Peyto shareholder's perspective but also interested in wider ramifications.

If that was the case presumably it would have been included in the book value. They recorded this at a discount to the lookthrough value of Aurora because they couldn’t sell it. They didn’t mention any debt that should be set against it.

In fairness this isn't massively away from book in absolute terms. It's just disappointing they couldn't have got a better deal. They must have had almost no exit rights, which suggests a badly written deal.

More worryingly, if this is the discount they have to accept for holdings with a visible (albeit lookthrough) market value, what on earth are they going to have to accept for junk like TauRx and Android? All the stuff where the value is really questionable is still on the balance sheet. As a common shareholder I'm now praying that: 1) they use some of their recent $40m cash inflow to tender for lots of prefs at a silly discount. 2) they convert the S5 pref at $2. Conversion is highly accretive to my bear case (so removes a lot of risk), somewhat accretive to my base case, and still leaves a lot of upside to my bull. 3) They find a Spindletop in Chad!

Ugh. That’s about the only holding (bar DPM) that’s been having good news (the ICC sale to Aurora and the Peru sale to Polaris). IIRC the last balance sheet value was at a liquidity discount to the value of the ICC stake only, with nothing for any other assets, so this sale is at a big discount. Ouch. Still, more cash in the bank and a harder NAV.

Yes, I’m aware of this but what I meant was how do you value it? P/earnings power? P/BV? P/TBV? I’m interested in how you think about this. Also, you say Thomas Cook was a home run. Was it? Or was it just Quess?

Sanjeev do you plan on sharing your notes & thoughts on the investments? It would be greatly appreciated if you can.

Trade deal? Yes, the options were at phenomenal prices.

Dazel, how do you value Fairfax?

May I ask why?

Good point. I haven't read much on it for a while. Will do so and revert. I've also reordered the stocks to reflect current size. In total this lot adds up to about $5.4bn (I may have some of the share counts wrong given how they are spread across subsidiaries). Edited for KW and with an additional observation at the bottom.

Please feed back if you get an answer. The CEO there has a very impressive background. As I have said elsewhere FFH does seem to be able to attract real talent to its projects.

Good point. I haven't read much on it for a while. Will do so and revert. I've also reordered the stocks to reflect current size. In total this lot adds up to about $5.4bn (I may have some of the share counts wrong given how they are spread across subsidiaries).

Agreed! I just didn’t want to end up looking at every investment they’d ever made so I limited myself to current needle-movers!

I was aiming for the big public positions. These are either small (now) or private. I always think it’s pretty tough to analyse the private ones given we seldom know the deal terms or postdeal performance.

There's been a lot of commentary about how Fairfax buy junk rather than owning great businesses for the long term. I decided to do a quick review to see whether the current holdings fit that assumption and also to see how they stack up. I did this for myself but I'm sharing it in case it is useful. It's not deeply researched and I have probably missed some important ones, but in rough order of size here the ones I have looked at are: Eurobank/Grivalia. I'll deal with these together since they will soon merge. Eurobank is one of the last 4 banks standing in Greece. This could become a very profitable oligopoly when Greece exits its depression, which it seems to be doing: GDP is growing, the fiscal and current accounts are in good shape, labour has regained competitiveness, unemployment is falling, and real estate prices are finally rising. Eurobank's nonperforming loans are fairly fully covered by provisions and collateral and the bank is profitable and generating capital every quarter. Grivalia is a leading Greek real estate company which has been picking up top assets at the bottom of the cycle. Postmerger (which also involves spinning a lot of the nonperformers out to shareholders as a bond) the bank will be well capitalised, profitable and trading on under 50% of book value. It won't pay taxes for years. There's a decent chance this is a major winner over the next few years. Recipe. Canadian casual dining restaurant chain created by Fairfax, who hand-picked management and look to be long term owners. There's debate about the quality of some of the brands but the business of franchising restaurant brands is a sound one and the stock's not expensive. The last couple of years have been spent building and professionalising the management platform and it will be interesting to see what they can do with it over time. M&A is a goal. ICICI Lombard. Fairfax cofounded this business with ICICI in the early 2000's and it has been a huge winner. They bought more as regulation allowed but then decided to sell down when ICICI decided on an IPO: ICICI still wanted control, and you have to list 20%, and Fairfax wanted a greater stake than would have been possible. They're now at 9.9%, the largest stake they can have and still control another insurer. That other insurer is Digit, a startup they expect to grow rapidly. Fairfax India. Holding company created by Fairfax to buy and build businesses in India. Fairfax will hold it forever. Buys, on balance, high quality franchises with great growth prospects (Bangalore Airport). Quess. Fairfax initially bought this fast-growing staffing company through Thomas Cook India and it has been a hugely successful investment. TCIL will spin it out in 2019 so it will become a direct investment. It continues to grow rapidly. Seaspan. Container ship leasing company of which FFH could eventually own 40%, purchased via warrants at crazy attractive prices. The first stock on the list that clearly isn't a high quality business, in the sense that it's in a cyclical industry with no barriers to entry and a reputation for capital ill-discipline. But it is cheap, on a c.30% free cash flow yield and the supply side of the industry is the best it's been in decades. Also, there's a new management team who are proven hard-asset capital allocators. FD: I am long Seaspan and expect to do very well from Sokol's decisions over the next decade. Blackberry. This can't be thought of as anything other than a mistake but for better or for worse Fairfax have stuck with it. They hand-picked the CEO who has done a good job of getting the company back to growth and FCF generation. Might be a winner in automated cars and the recent acquisition of Cylance may be a positive too (see most recent BB call for some breathless comments from an analyst). Hard to know but if I had to guess I'd say this was past the worst and the valuation is starting to look vaguely reasonable (at least on EV/EBITDA). FFH have huge leverage to the upside if this works soon: their stake basically doubles when the stock goes through $10 due to a $500m convert due 2020. Thomas Cook India. India's leading travel agency. Fairfax has controlled it since 2012 and has used it to buy a number of related businesses from Kuoni. One gets the sense they're building a long term platform here in a growing and profitable industry. Commercial International Bank of Egypt. High quality bank in an incredibly underbanked country. Consistently earns 30% nominal ROEs and Fairfax commentary suggests to me they will hold for a long time. Political risk is meaningful. Resolute Forest Products. The worst on the list, for me. Fairfax have been involved for 11 years and haven't done well. Kennedy Wilson is an active real estate manager which invests its own money alongside third party money wherever it finds value, and recycles capital regularly. Fairfax has owned shares since 2010. Growth for the next few years should come from completing developments and growing third party AUM (the company has $2bn in third party AUM and aims to add $1bn a year for the next several years). As of early 2019 the share price is $19 and JPM estimate the NAV is $26 going to $30 in 2020. The dividend is 4.4% and rising, and a buyback is in place. The founder/CEO owns 9% and Stanley Zax (Zenith) and Richie Boucher (BKIR) are on the board. As well as owning shares Fairfax have invested $700m alongside KW since 2010 and done well. (As an aside the annual letters say FFH initially bought 11.5m shares at an average price of $11.90, mainly through convertible prefs; this stake went to 12.2m at an average cost of $11.37; and then 12.3m at an average cost of $11.10. This implies a cost of $2.66 for the second purchase and a negative cost for the third, yet the shares never traded below $16. Either there's an error or FFH had a bizarrely juicy option, or they're doing something naughty like subtracting the dividend from the cost.) Fairfax Africa Holdings. Holding company created by Fairfax to buy and build businesses in Africa. Fairfax will hold it forever. Has made a slow start but has some promising investments. IIFL Holdings. Long term holding in a fast-growing financial services provider. FFH holds a direct stake as well as one through Fairfax India. Has been a huge winner. Stelco. Recent (and comically poorly timed) investment in Canadian steel company recently out of bankruptcy. Not a good industry but stock is unencumbered and very cheap on near term cash flows. It also has real estate optionality and management who claim to be countercyclical capital allocators and who want to build a much bigger company when asset prices are cheap. --- For me a few common themes seem apparent: 1) Fairfax are long term, patient value investors. Beyond that they are not easy to characterise. Sometimes that value is in cheap junk (Stelco). Sometimes it's in quality growth (Quess). 2) Many of these holdings are long term M&A platforms. Fairfax like partnering with (what they see as) good management to build businesses over decades. I suspect in some cases this will last for decades (Recipe, FIH, FAH, TCIL, maybe SSW). In many cases they build the platforms and pick the managers. 3) Fairfax take huge positions. On the downside this means they can't exit losers (RFP, BB, Eurobank). Even if they they eventually turn a profit, it's hard to see how they earn a good IRR. On the upside, when it works they end up with big stakes in huge winners (ICICI Lombard, Quess, IIFL). 4) Fairfax often get good terms for their shares (e.g. the SSW, KW, and BB converts, and the FIH/FAH fee structures) which skews the risk/reward in their favour. 5) On balance, I am inclined to think there is a lot of value in the portfolio currently.

I agree 200%.