Fairfax India new issue

[Spekulatius]

@Crip1 and @ICUMD good point from both. I do think that business performance is not always correlated with stock price performance - in fact the very fact that value investment works implies that it is not always so.

 

I do hate fund structures like FIH and think in 90% of the cases, it's just better to invest in the mothership ($ FFH). Brookfield ($BAM)  is another example of this.

Edited June 30, 2022 by Spekulatius

[ICUMD]

50 minutes ago, Spekulatius said:

@Crip1 and @ICUMD good point from both. I do think that business performance is not always correlated with stock price performance - in fact the very fact that value investment works implies that it is not always so.

 

I do hate fund structures like FIH and think in 90% of the cases, it's just better to invest in the mothership ($ FFH). Brookfield ($BAM)  is another example of this.

Point well taken.

 

At the time I made my initial position, I was motivated by the pure play in India and quality of assets. I also reasoned based on the tremendous growth rate potential in India, ties to government via Modi etc. that the fees would be justifiable.

 

Clearly, the story hasn't panned out this way.  

 

So the question now becomes, how and when do you reduce your position if you are invested in FIH.U?

 

Incidentally, I held Brookfield Property partners which was bought back by BAM.  They did the buyback at a fair market price.  

 

Hopefully Prem is true to his intentions with helping realize 'Fair' value for holders of FIH.U.   If not, he may risk difficulty raising funds in the future for similar endeavors.

 

It seems that he has bought out other institutional investors at their loss already during prior buybacks.

 

 

 

Edited June 30, 2022 by ICUMD

[This2ShallPass]

On 6/30/2022 at 1:16 PM, Spekulatius said:

I do hate fund structures like FIH and think in 90% of the cases, it's just better to invest in the mothership

This decision has to based on the relative prices, I think we're in that 10% here:) 20-30% discount to BV seems common, but when the discount is at 50+% it's better to buy the underlying. To me personally, it's a vehicle to invest in India and given the growth trajectory there I feel comfortable paying the discount (knowing very well I will not be able to get the deals Fairfax gets or have the expertise to invest in the Indian market).

 

We know they bought back shares at $15 and will do that again, so that could be a reasonable floor. Buying today gives a minimum 35% upside (current market conditions make that return even better).

 

ps: I have been a lurker for many years and this is my first post. I have benefited greatly from the wisdom of many posters here and thanks to everyone for generously sharing your thoughts.

 

[Spekulatius]

Discount or the ratio of price/ book looks like we in the 20% range,not the 10% range yet. During the pandemic, it appears the discount was larger. 

Welcome to the boards @This2ShallPass!

 

Edited July 3, 2022 by Spekulatius

[ICUMD]

A nice overview of Aviation prospects in India.

 

https://m.economictimes.com/industry/transportation/airlines-/-aviation/as-traffic-picks-up-aviation-sector-charts-expansion/articleshow/92774641.cms

[glider3834]

[elliott]

On 6/7/2022 at 12:21 PM, ICUMD said:

Presently, I think there is a great opportunity for Fairfax India to scoop up all these quality infrastructure assets for a steal.  [...] I bet demand for FIH owned assets will grow at an exponential rate.

 

How is FIH able to get those kind of assets at a bargain? If their prospects are so good, one would think that sellers would know.

Additionally, one would expect a certain level of scrutiny from the public, press, and/or political rivals that would keep the sale "honest" - even though it is usually said that there is a lot of corruption in India.

Thanks.

[TwoCitiesCapital]

8 hours ago, elliott said:

 

How is FIH able to get those kind of assets at a bargain? If their prospects are so good, one would think that sellers would know.

Additionally, one would expect a certain level of scrutiny from the public, press, and/or political rivals that would keep the sale "honest" - even though it is usually said that there is a lot of corruption in India.

Thanks.

 

I mean, how does anyone outperform if this stuff is true? 

 

Nobody wants to invest in EM at the moment (or rarely at for the last decade really). This is demonstrated by net flows and the strength of the USD versus any other currency. So Fairfax has that going for them. 

 

Infrastructure assets require long-term outlooks and potentially large upfront cash/capital outlays. This dissuades hedge funds/mutual funds/ETF flows from participating. Fairfax has that going for them. 

 

Fairfax has intimate knowledge of the local customs/culture and has been doing business in the area for years. So they have that going for them. 

 

Their primary competition will be local businessman - how many of them have the pockets to put something together to bid on multiple infrastructure plays? Fairfax India has itself, it's parent company, a number of investors, and deep pocketed partners. So Fairfax has that going for them. 

 

Lots of things make these a natural play for Fairfax and for few others. Doesn't mean they'll get them for a 'steal', but does mean they'll probably do well with the price their able to pay. 

 

 

[glider3834]

6 hours ago, TwoCitiesCapital said:

 

I mean, how does anyone outperform if this stuff is true? 

 

Nobody wants to invest in EM at the moment (or rarely at for the last decade really). This is demonstrated by net flows and the strength of the USD versus any other currency. So Fairfax has that going for them. 

 

Infrastructure assets require long-term outlooks and potentially large upfront cash/capital outlays. This dissuades hedge funds/mutual funds/ETF flows from participating. Fairfax has that going for them. 

 

Fairfax has intimate knowledge of the local customs/culture and has been doing business in the area for years. So they have that going for them. 

 

Their primary competition will be local businessman - how many of them have the pockets to put something together to bid on multiple infrastructure plays? Fairfax India has itself, it's parent company, a number of investors, and deep pocketed partners. So Fairfax has that going for them. 

 

Lots of things make these a natural play for Fairfax and for few others. Doesn't mean they'll get them for a 'steal', but does mean they'll probably do well with the price their able to pay. 

 

 

good points Twocities I would just add point that was made at Fairfax's AGM that a lot of these infrastructure assets have been developed by govt over decades but are not well managed (my take - that would be reflected in the sale price).

[Parsad]

With the rupee where it is, I would hope that FFH and FIH are injecting more capital into India and looking at more businesses to acquire.  Cheers!

 

https://finance.yahoo.com/news/india-rupee-drops-another-record-035250125.html

[Crip1]

17 hours ago, Parsad said:

With the rupee where it is, I would hope that FFH and FIH are injecting more capital into India and looking at more businesses to acquire.  Cheers!

 

https://finance.yahoo.com/news/india-rupee-drops-another-record-035250125.html

Full disclosure that international currencies is not in my circle of competence. 

It’s understood how the INR’s devaluation has impacted FFHI, but how would the investor know whether that devaluation is temporary or more permanent? 
 

-Crip

[rohitc99]

2 hours ago, Crip1 said:

Full disclosure that international currencies is not in my circle of competence. 

It’s understood how the INR’s devaluation has impacted FFHI, but how would the investor know whether that devaluation is temporary or more permanent? 
 

-Crip

India has a history of weakening the rupee over time. you may want to model 3-4% annual depreciation against the dollar.

[petec]

On 7/20/2022 at 5:31 PM, Crip1 said:

It’s understood how the INR’s devaluation has impacted FFHI, but how would the investor know whether that devaluation is temporary or more permanent? 

You don’t, but over the long term the change between two currencies should approximate the difference in inflation. If you assume FIH’s assets are real assets - which you’d very much hope good equities should be - then their intrinsic value should rise to offset the currency fall. 
 

However this is only over the long term, and in my experience slowing GDP in an inflationary environment can wreak havoc because corporate earnings can be compressed (it’s far easier to overcome inflationary cost pressures in a strong economy than a weak one, but inflation usually creates a weak one) and multiples fall. So there is a multiyear risk of a triple whammy: lower fx, lower earnings, and lower multiples. I’ve lived this in Latin America over the last decade. 
 

India’s issue in the current environment is that it is an energy importer. If they can drill enough oil and gas at home to change this it would be a huge boon for them. 

[glider3834]

interview re BIAL -  will be able to handle 60 mil passengers (T1 36 mil plus T2 25 mil )after T2 completed -  not sure how quickly they will scale up to 60 mil after T2 opens- that part of the interview requires a subscription ...arghh

 

https://airwaysmag.com/bangalore-kempegowda-airport/

[ICUMD]

Nice article on future development plans at BIAL

 

https://www.newindianexpress.com/states/karnataka/2022/aug/08/phase-1-of-bengaluru-airport-city-to-open-by-2025-2485210.html

[Pedro]

Does this mean that FFH increased stake has been approved? 
Prospectus is showing their vehicle for owning Fairfax India at 83.65%?

Am i reading this wrong? 

 

 

[This2ShallPass]

What should an appropriate holding company discount be to BV? At 30%, FFXDF should trade ~$12.5.

 

They have $209M in cash, is another SIB coming? With Fairfax India trading at such a discount, I would like to see them buy back shares before buying more companies.

 

I'm also not sure about some of the recent buys like Maxop / Jaynix, why buy such small companies...even if they do really well they won't move the needle much and is going to be a distraction for management.

 

 

[ICUMD]

18 hours ago, This2ShallPass said:

What should an appropriate holding company discount be to BV? At 30%, FFXDF should trade ~$12.5.

 

They have $209M in cash, is another SIB coming? With Fairfax India trading at such a discount, I would like to see them buy back shares before buying more companies.

 

I'm also not sure about some of the recent buys like Maxop / Jaynix, why buy such small companies...even if they do really well they won't move the needle much and is going to be a distraction

Unfortunately, mark to market value realization in this company will likely come through Fairfax initiative to do large scale buybacks.

 

I sense there is very little foreign buyer interest in the holdco and this is not yet traded via Anchorage on the Indian exchanges.

 

It's really a play on the Bangalore airport with a smattering of other holdings. 

 

The discount to book value we see now could last a very long time IMO. A classic example of a value trap.

 

 

 

[TwoCitiesCapital]

5 hours ago, ICUMD said:

Unfortunately, mark to market value realization in this company will likely come through Fairfax initiative to do large scale buybacks.

 

I sense there is very little foreign buyer interest in the holdco and this is not yet traded via Anchorage on the Indian exchanges.

 

It's really a play on the Bangalore airport with a smattering of other holdings. 

 

The discount to book value we see now could last a very long time IMO. A classic example of a value trap.

 

 

 

 

It's not a value trap if management uses liquidity from monetizations and IPOs to repurchase shares to increase book value. 

 

Even if the discount persists, buying shares at a 30-40% discount to NAV is accretive to value even without discount closing. 

 

You're getting the underlying performance of the assets + additional accretion from buying $1 at a discount and reducing share count + any closing of the gap to NAV. 

 

The last piece is a large one-time kicker, but it's the other two that set up long-term compounding potential while you wait for that one-time kick. It would only be a value trap if you were waiting for that last piece without the first two. 

Edited August 23, 2022 by TwoCitiesCapital

[Viking]

Fairfax India is a strange animal to me. Given its stock is currently trading below $11 i am not sure it is a value trap at the current price. My guess is a new investor will earn an adequate return on their investment. (Legacy investors who bought at a much higher price… well that is a different matter.)
 

Fairfax India’s managements team’s performance has been very good (book value growth since inception). Their hit rate with investments has been very good. They own an impressive group of assets that look well positioned to grow in the future. They have started to monetize some legacy positions that have increased substantially in value and are re-deploying into new opportunities (like Maxop/Jaynix).
 

Management has been getting more aggressive with share buybacks (no brainer use of cash). They have a high cash balance today and will have much more when IIFL Wealth sale closes. This suggests to me another big buyback is coming (perhaps another Dutch auction). This use of funds is also is very good for Fairfax shareholders (significantly increasing ownership in a very well run company). 

Edited August 24, 2022 by Viking

[ICUMD]

On 8/23/2022 at 3:44 PM, TwoCitiesCapital said:

 

It's not a value trap if management uses liquidity from monetizations and IPOs to repurchase shares to increase book value. 

 

Even if the discount persists, buying shares at a 30-40% discount to NAV is accretive to value even without discount closing. 

 

You're getting the underlying performance of the assets + additional accretion from buying $1 at a discount and reducing share count + any closing of the gap to NAV. 

 

The last piece is a large one-time kicker, but it's the other two that set up long-term compounding potential while you wait for that one-time kick. It would only be a value trap if you were waiting for that last piece without the first two. 

What about if you only get the first two, but not the last one?

Or perhaps the last one occurs so many years down the road that you've lost out on the opportunity cost?

 

This is a well performing and managed company IMO with excellent underlying assets.

However, only large scale transactions seem to realize value (ie closing the gap to NAV) which are majority owner buybacks by Fairfax.  And those buybacks are not guaranteed and when they are offered, are heavily discounted to book value.

 

To me that's the Value Trap.  

There is inadequate price discovery on the day to day trade from multiple buyers. 

 

I know Buffet would often look for these value 'net net' companies, (I'm not implying that FIH is a net net company)

What I don't know is how do you realize value in these rare birds if there is no buyer?

 

[TwoCitiesCapital]

23 hours ago, ICUMD said:

What about if you only get the first two, but not the last one?

Or perhaps the last one occurs so many years down the road that you've lost out on the opportunity cost?

 

This is a well performing and managed company IMO with excellent underlying assets.

However, only large scale transactions seem to realize value (ie closing the gap to NAV) which are majority owner buybacks by Fairfax.  And those buybacks are not guaranteed and when they are offered, are heavily discounted to book value.

 

To me that's the Value Trap.  

There is inadequate price discovery on the day to day trade from multiple buyers. 

 

I know Buffet would often look for these value 'net net' companies, (I'm not implying that FIH is a net net company)

What I don't know is how do you realize value in these rare birds if there is no buyer?

 

 

Because there will be a buyer - someday. It's all sentiment driven. This USED to trade at a premium to NAV and had plenty of buyers. 

 

They delivered on the results front, but sentiment changed so the premium went to a discount. I didn't own this when it IPO'd because of the premium + the fees. I own it in size today because of the discount. All you need is more people like me which will occur with a change in sentiment. 

 

What is the catalyst for that? Who knows, but I don't believe investors will be permanently bearish on something that compounds 10-20% per year that can, and is, actively delivering additional value via the cancellation of shares at a 30-40% discount. Maybe just need the USD to back off it's 20-year highs and the liquidity spigot turned back on which we know will likely happen after the next recession 

[Xerxes]

See attached piece about the passing of a titan in India. See the last paragraph. Conviction is inversely correlated to your geographical distance from the promise land. 

 

We are in North America so we see FIH as boring, boring, boring 

 

 

[This2ShallPass]

On 8/23/2022 at 12:44 PM, TwoCitiesCapital said:

It's not a value trap if management uses liquidity from monetizations and IPOs to repurchase shares to increase book value. 

 

Even if the discount persists, buying shares at a 30-40% discount to NAV is accretive to value even without discount closing. 

@TwoCitiesCapital aren't first two the same, i.e. buybacks increase BV/share only if you buy at a discount? Overall, I agree with what you're saying. 

 

How much cash will the IIFL wealth sale generate? This combined with their cash on hand means a high likelihood of another dutch auction.

 

@ICUMD I think Prosus showed the blue print for reducing holdco discount. After years of trying everything other than selling Tencent shares, they finally gave in and the discount closed fast. Same could be done hereafter Anchorage IPO. I would prefer them to keep BIAL shares but not with a persistent 30% discount..  

 

[SafetyinNumbers]

I think the end of the third performance fee period is a catalyst to close the discount.
 

The VWAP settlement of the performance fee is a built-in incentive to close the discount to NAV before Dec 2023. Arguably that was more of an incentive before last quarter as the book value declined reversed more than half of the performance fee due (it also dampens qoq book value volatility when in the money).

 

The first two incentive periods were less interesting because in the firstthere was no NAV discount and in the second the performance fee was so small, many more shares were bought back at lower prices.

 

Also Prem’s been pretty active lately. For all we know, if FFH earnings are as strong as can be expected and it uses its own resources on buybacks, Prem could be in a position to issue 1.2-1.4x BV stock to buy out the FIH.U minority (ex OMERS) for stock at BV. 

 

Seems like a giant win for everybody.