SafetyinNumbers

Fairfax has quite a few catalysts over the next 6 months that could help increase Social Value or increase Intrinsic Value. I use the formula Market Value = Intrinsic Value + Social Value. As I noted above, I think Fairfax trades well below its IV range implying that its SV must be negative. I thought it would be interesting if we could brainstorm the upcoming catalysts and what impact they might have on either SV or IV with as much or as little specificity as desired. I’ll start and please add your own. 1. Annual Report and Shareholder’s Letter (early March?) - SV impact could be big. Fairfax will restate its 2022 financials when they file which will repopulate every database quants use to analyze the company. IFRS 17 has smoothed out earnings which quants and the casual quality investor will appreciate. Prem also writes a great letter with lots of tidbits to appreciate the value of some of Fairfax’s most opaque holdings. That might convince investors to pay more increasing SV. 2. Eurobank earnings and dividend announcement (mid March) - This could impact both SV and IV. EUROB is worth about $100/sh to Fairfax and our share of dividends could be $5/share. The SV impact could come from investors appreciating dividend income more than our share of income from associates. Eurobank stock could also rise as yield buyers are one of the few investor groups willing to buy on upticks. 3. I have more but my train is getting into the station. Please add yours. Thanks!

I think it’s for the whole company.

You both make great points. We all have different assessments of intrinsic value but ultimately passive and active investors benchmarked to the S&P/TSX Composite and S&P/TSX 60 will determine where in the IV range we trade. I have personally made the mistake of selling too soon in a rerating more times than I can count because I was afraid of a drawdown. I’m determined not to let that happen again but I assume it will become more difficult once we are in the IV range especially for shares held in registered accounts where there are no tax consequences. Currently, it’s easy to own or buy FFH given the set up. My current strategy is to wait until my forward ROE estimate is less than 10% to sell any. Because as long as it’s higher than that, FFH’s weight probably keeps going up in the index drawing in more institutional buyers.

Makes sense, thanks.

Why do you want to? FRFHF is generally more liquid although for both I would convert the FFH.to bid/ask before putting in an order.

RBC target is US$1200. It’s 1.1x their BV estimate. They leave their 2024 EPS estimate unchanged at US$140 and increase 2025 to US$152 from US$150. Maintain Outperform rating.

He retired last year. I think it’s silly he thinks FFH traded at a discount because the market figured it out. I believe it has more to do with quant preferences. It doesn’t help if analysts like him think the market is efficient so keep their estimates unrealistically low as it just creates a feedback loop. Of course, it doesn’t matter in the long run.

The no moat stuff is nonsense but it’s the improbable earnings estimates that I really have trouble reconciling.

I think it qualifies for the S&P/TSX 60 but additions and deletions are subject to committee as @nwoodman pointed out and historically they don’t act unless there is an opening via M&A or a constituent goes below 20bps. Currently, there is no opening but there is usually some turnover annually so presumably it’s just a matter of time. Given the built in growth at Fairfax its weighting is only going higher, it’s possible the committee acts and deletes an constituent above the 20bp historical precedent or deletes a smaller financial to help with the sector representation. I spoke to a few fund managers this week and to me seems like a logical approach given valuation and catalysts (Digit IPO, Eurobank dividend, BIAL IPO etc…) is to stay overweight until at least the week of 60 add. It will probably be a mistake to sell then as well in the long term but that will depend on the multiple and prospects at the time.

Good points. I was focused more on returns on the investment portfolio and growth in associates income can push ROE closer to 20% than 10%.

Not just at the Fairfax level but also at big holdings like Atlas and Eurobank.

I think you are correct it won’t impact EPS but I think any dividend would reduce carrying value and go into dividend income. Lately, i don’t think the market is sophisticated at all but some investors might value dividend income higher than associates income because the former is more certain and the latter more volatile. On a separate note, I think the restating of 2022 earnings for IFRS 17 will make FFH screen better once the financial statements are filed and all of the data stores refreshed. Book value grew by $125 instead of $27 in 2022. The ROE over the last three years is almost impossible to believe for a company of this size. There is nothing to suggest that the next three years can’t look similar although that’s not my base case. I do think the odds of a 20% CAGR in BV including dividends to the end of 26 is higher than a 10% CAGR. I think that it good enough to beat the market over the next three years but most institutions are playing a different game. Now that game does include quants who might like the restated numbers more because of the smoothing. IFRS 17 is better for investors because of how investors invest. Looking backwards. Who can blame them. It has worked and is working but FFH will get a lot prettier in a few weeks once the computers can see the numbers. It will look prettier to investors too especially on the returns table in the Annual Report.

60bps difference between Canada and US 10 year benchmarks so it’s not apples to apples.

This morning DRT announces small SIBs for the DRT.DB and DRT.DB.A. Not much of a premium and I’m not sure I should tender any,

News on the Digit board about IRDAI approval. SEBI approval also expected soon and speculation on H1 IPO. It will be nice when it’s priced above FFH’s mark but we’ll see how it goes.

I read that as IRDAI approval has been received and the two people were referring to SEBI approval. The Rupee has weakened since 2022 when they filed the initial IPO. At the time the suspected IPO valuation was $4.5-5b. On the same basis, the low end would be down to $4b. It’s grown a lot since then but perhaps there has been some multiple contraction. It looks like the plan is to sell 12.5% of the company with $150m being fresh issue and the rest from promoters. I don’t know if that includes Fairfax selling some. If anyone has any colour, please share.

That’s more of a question on investor psychology. Prem isn’t even thinking about selling. It’s not something he has to worry about and maybe we shouldn’t either no matter how hard it is.

That would have been more of a concern a few years ago but they are earning ~$1bn a quarter now. It gives them a lot more leeway. The equity portfolio might go down 25% but it’s unlikely the bond portfolio would. They might have large gains there if rates plunged.

I want us to be valued as highly in the intrinsic value range as possible for as long as it takes to issue equity accretively. Having a high valuation has a ton of optionality because if disaster strikes in terms of large cat losses, it would be much cheaper to raise equity not necessarily because it was needed but to grow aggressively in a hard market with cheap capital. If Fairfax could issue paper at 2.5x BV like IFC and TSU do whenever an opportunity comes their way to make a nice return it provides huge option value and has a big impact on ROE.

Sure but the weight is what forces everyone benchmarked to the index to chase. Shrink the weight and it reduces the incentive. Plus they have high certainty on book value growth for the foreseeable future. The only reason to take it off now is drawdown aversion, which I know most investors have but Fairfax shouldn’t . The spread on the financing cost vs what the cash you want to deploy earns is probably ~100bps so not that big a concern.

I don’t think it’s a benefit to reduce TRS in benefit of buybacks as shrinking the market cap hurts eligibility into the S&P/TSX 60 and reduces financial flexibility. I hope they in fact put more TRS on during the quarter. There was a decent sized cross back in November that looked like it could be TRS related but as usual, I’m just speculating.

Pretty good update from DRT.TO, I thought but converts DRT.DB.A are still offered at 58.

I think we know why FFH owns gold stocks. It reminds me of back in the early 2000s when gold multibagged in a short period of time. This time, however, the gold stocks are much cheaper. If anyone is interested in gold stocks, please allow a brief plug that I’m on the board of Sailfish Royalty (FISH.V) which owns a royalty on Mako Mining’s (MKO.V) project in Nicaragua and owns a royalty on a gold development project in Nevada called Spring Valley that is controlled by Waterton (a PE firm). The Spring Valley project represents the majority of the NAV for FISH. Both MKO and FISH are controlled by Wexford Capital which initially controlled and brought Diamondback Energy (FANG) public in 2012. This week FANG announced a deal to create a $50b company. FANG has CAGRed at 22% since inception. MKO is Wexford’s gold vehicle hoping to create a lot of value during the pending gold bull market through intelligent acquisitions and superior capital allocation. The stock has not done as well as multiples have contracted in the space and trades at just over half the price where Wexford bought stock on the last equity issue in 2020 at C$4.00. Most investors have a heuristic against investing in mining and gold in particular but as MKO is now strongly FCF positive they have capital to invest in an industry where the cost of capital is astronomical. That bodes well for strong returns going forward as a business owner even if the market doesn’t appreciate it right away. I think for any given gold stock, a 1% position max, is appropriate. Mining is risky after all. Clearly, I’m breaking that rule with my own positions.

A combination of the USD wrecking ball that outperforms all currencies for technical reasons over the long term and oil prices being down, especially in real terms from $110 in 2011.

There are a bunch of booths set up with Fairfax businesses and their management available to chat so it’s best to come early. It’s usually a few hours but I guess until we run out of questions. Historically, there has been lunch served afterwards and then the Fairfax India meeting at 2. This year the FIH AGM is on Wednesday so not sure