Fairfax India new issue

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Fairfax India Q4 results press release (PDF):

https://s1.q4cdn.com/293822657/files/doc_news/2023/FIH-2022-Q4-Press-Release-Final.pdf

[hobbit]

https://www.afr.com/world/asia/iphone-maker-plans-1b-india-plant-in-shift-from-china-20230303-p5cp9f

 

This should be a huge positive for BIAL

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In case anyone forgot with all the attention on the Fairfax Financial letter, Fairfax India's letter and especially the section on BIAL (pages 7-10) is very good.

 

https://s1.q4cdn.com/293822657/files/doc_downloads/2023/03/FIH-2022-Anual-Report-Letter-to-Shareholders-with-Attachments-Final.pdf

[This2ShallPass]

Shares outstanding increased from 106M to 147M from 2015 to 2017. Did they issue additional shares to buy BIAL or something else?

 

How much of the increase in shares are due to the performance fee paid to Fairfax, wondering if it'll still be a good investment if Fairfax continues to get shares (especially at such a big discount to BV)?

[giulio]

8.2M shares issued to satisfy performance fee so far.

42.5M shares issued to raise additional capital as they had good investment opportunities in 2016-2017.

 

I hope someone asks questions about compensation at the annual meeting. I don't understand why FFH needs to take cash fee on unemployed capital + shares for performance every 3 years, since FFH already controls FIH through multiple voting shares.

I would prefer that capital to remain in FIH until they find a new suitable investment. I don't think FFH needs more incentives than their big ownership stake.

 

Guess we have to live with it. The investment is still compelling to me.

G

[Viking]

1 hour ago, This2ShallPass said:

Shares outstanding increased from 106M to 147M from 2015 to 2017. Did they issue additional shares to buy BIAL or something else?

 

How much of the increase in shares are due to the performance fee paid to Fairfax, wondering if it'll still be a good investment if Fairfax continues to get shares (especially at such a big discount to BV)?

Fairfax India BV at Dec 31, 2022 =$19.11/share. Stock closed on Friday at $12.60. Is Fairfax India a good investment? Well it certainly looks cheap with a price to BV = 0.66. 
 

How cheap? This depends on what you think about book value. Does it fairly reflect the value of the companies owned by Fairfax India? The disclosure provided by Fairfax India on each of the companies it owns is very good.

 

The largest asset owned by Fairfax India is BIAL (40% of BV?) …. Probably a good place to start. 
 

Another question that has been debated on this board for years is: What will cause the significant discount to BV to close? The following question might be a better starting point: Why does the discount exist today? It didn’t always exist. 
—————

If Fairfax India is as cheap as it looks (let’s assume it is worth $19.11/share), does the fee structure matter? Is it material to making a purchase decision today? 

Edited March 12, 2023 by Viking

[SafetyinNumbers]

1 hour ago, Viking said:

Fairfax India BV at Dec 31, 2022 =$19.11/share. Stock closed on Friday at $12.60. Is Fairfax India a good investment? Well it certainly looks cheap with a price to BV = 0.66. 
 

How cheap? This depends on what you think about book value. Does it fairly reflect the value of the companies owned by Fairfax India? The disclosure provided by Fairfax India on each of the companies it owns is very good.

 

The largest asset owned by Fairfax India is BIAL (40% of BV?) …. Probably a good place to start. 
 

Another question that has been debated on this board for years is: What will cause the significant discount to BV to close? The following question might be a better starting point: Why does the discount exist today? It didn’t always exist. 
—————

If Fairfax India is as cheap as it looks (let’s assume it is worth $19.11/share), does the fee structure matter? Is it material to making a purchase decision today? 

 

I think about these questions a lot.

 

Why does the discount exist today?

 

I think it's a transition to ETFs for active investors wanting to express "bets" on India combined with a transition of active investing to quants and quality investing. Quants want predictable earnings streams and so do most active investors. The active investors left over are mostly value investors and they do not like to buy on upticks so the discount persists.

 

Does the fee structure matter at this discount?

 

I think the fee structure actually matters more the bigger the discount is because the fees are paid in shares. I think the original intention of the performance fee being paid in shares was to incentivize the discount/premium to narrow at least every three years. At a discount, minority shareholders are motivated to close the discount so that less shares are issued to FFH. If the minority shareholders don't step up then the independent directors are motivated to do share buybacks to help close the discount or at the very least to prefund the performance fee. I have been expecting another SIB ever since the recent sale of IIFL close. They have taken a month off of the NCIB which usually happens before an SIB is announced so maybe they will act soon or wait until later in the year closer to the performance fee calculation.

 

What will cause the discount to close?

 

The first borrowed/paraphrased from, Trevor Scott, at Tidefall who owns it in his fund is that Prem will regain his status as preeminent investor based on FFH stock performance. FIH.U has a float less than $1b, if FFH returns to a decent premium to book over the next three years, investors will likely come for FIH.U. I recognize this time frame is too long for most active investors.

 

Second, a successful completion of the Anchorage IPO. If Prem's rockstar status in India can get Anchorage a premium valuation on the back of holding a premium asset like BIAL, it could become the growth vehicle for FIH.U. NA investors might find it easier to buy FIH.U instead of buying Anchorage directly. 

 

 

Edited March 12, 2023 by SafetyinNumbers

[This2ShallPass]

3 hours ago, giulio said:

8.2M shares issued to satisfy performance fee so far.

42.5M shares issued to raise additional capital as they had good investment opportunities in 2016-2017.

Thanks @giulio. So about 6% dilution in 8 years ($100M) due to performance fees, not crazy about it but not egregious.

 

1 hour ago, SafetyinNumbers said:

I think the fee structure actually matters more the bigger the discount is because the fees are paid in shares.

Great post @SafetyinNumbers. Yes, this is my concern, it's like Fairfax performance fee gets a 30% boost. I didn't think about the structure providing natural incentive to close the discount, which makes sense and hopefully the directors act on it (if they're truly independent and not related / dependent on Prem / Fairfax in some fashion).

 

[SafetyinNumbers]

3 hours ago, This2ShallPass said:

Thanks @giulio. So about 6% dilution in 8 years ($100M) due to performance fees, not crazy about it but not egregious.

 

Great post @SafetyinNumbers. Yes, this is my concern, it's like Fairfax performance fee gets a 30% boost. I didn't think about the structure providing natural incentive to close the discount, which makes sense and hopefully the directors act on it (if they're truly independent and not related / dependent on Prem / Fairfax in some fashion).

 

Thanks. I think it’s important to note that on average the shares issued for the performance fee were done very close to BV while the buybacks have been done at big discounts to book. Arguably, the strategy is effective. They have a lot of work to do this year though and it will certainly be addressed at the AGM. 

[SafetyinNumbers]

8 hours ago, giulio said:

8.2M shares issued to satisfy performance fee so far.

42.5M shares issued to raise additional capital as they had good investment opportunities in 2016-2017.

 

I hope someone asks questions about compensation at the annual meeting. I don't understand why FFH needs to take cash fee on unemployed capital + shares for performance every 3 years, since FFH already controls FIH through multiple voting shares.

I would prefer that capital to remain in FIH until they find a new suitable investment. I don't think FFH needs more incentives than their big ownership stake.

 

Guess we have to live with it. The investment is still compelling to me.

G

Another way to look at is book value has grown just under 9% / year since inception and arguably intrinsic value is worth well north of book value so actual investment returns are higher. I think that’s higher than Indian ETFs but I don’t know how to check that for sure. 
 

 

[ICUMD]

Some good points. 

 

Judging from the very low daily trading volumes,  discount to book value may be simply due to lack of interest.  

 

NCIB is probably the biggest net buyer of shares and only at highly discounted times.  

 

SIB is probably the best opportunity to get close to BV anytime soon.  Of course, they may have acquisitions in lieu of SIB in mind also. 

 

 

[valueinvesting101]

I feel annual letter adds too many details not relevant for shareholders while skipping important details. 

It mentions that "The tariff order for the second control period (from April 2016 to March 2021) was finalized by AERA in August 2018, well after the control period had begun." Isn't this weird that fees to be charged for the period are determined by the regulator for the 2.5 years after the actual period has began? I hardly find things are improving markedly in India in terms of government bureaucracy if it takes 2.5 year to decide tariff to be charged. 

Annual letter fails to inform tariff order for the 3rd control period even when it has already been approved by government and came in below the amount requested by BIAL. I found omission of this detail very perplexing.  Regulator did better job of deciding new tariff for the 3rd period (Apr 2021 to March 2026) only 4 months after the period began. 

Even with new tariff for the 3rd control period, what will be the revenue for BIAL? It seems current revenue is around 200 million. Even if it doubles to 400 million, isn't airport trading at huge multiple of P/S to come up with valuation of $2.4-3 billion? 
Real estate and infrastructure development will be time consuming and tedious process in India which can easily take 3-5 years to add meaningful cash flow. 

Most of the investments made since 2018 have not generated good returns so far. Book value growth is determined to large extent by BIAL and Sanmar valuations but those valuation seems stretched. Even Sanmar investment has been done at the holding company level which also included Egyptian operation. Not sure if anyone has more insight into valuation of that Sanmar holding company and leverage at the Egyptian operation.

 

[giulio]

The way I look at FIH is a dollar bill selling for 50 cents that will grow over time. These are the best investments you can make and the ones I prefer. Frankly, the discount does not bother me too much since they are not going to pay for an acquisition with undervalued shares.

 

How much will the investment compound from here? 10% per share (considering dilution/buyback) seems reasonable considering past results, underlying companies economics and FX.

 

BIAL, close to 50% of portfolio, should earned a guarantee return of 16% on equity

• non-aereo revenue, e.g. duty free, shops ecc, cargo revenue and real estate may provide additional upside
• I am not sure, but while UDFs (aereo revenue) are capped at 16% return, non-aereo revenues should not be capped and have higher margins

What companies make up the other 50% of FIH portfolio?

Small, mid-cap firms, with c. 15% ROE and mid-teens to HSD growth rate, operating in sectors that should enjoy strong tailwinds as GDP (and GDP per capita) increases.

Examples:

• Finance and banking: 
  • IIFL Finance --> 16% CAGR in AUM (last 5 years), 29% revenue growth in 2022 and HDD ROE
  • CSB Bank --> income increase 40% in 2022 but the bank will benefit from better management and higher efficiency in the future
  • NSE --> I wished they bought more than 1%! Great business
• Shipping:
  • Seven Island --> "Despite this volatility, SISL has mostly demonstrated stable and consistent revenue and EBITDA CAGR of about 25% in the last 10 years"
• Maxop and Jaynix --> precision die casting; this reminded me of an investment that WESCO made in the 80s, Precision Steel. I have no idea how these investments will play out; Precision Steel had its niche, earned good returns for some time but suffered during economic contraction. Not a "cinch".

I was impressed by their Investment Selection section in the latest AR.

I also like a lot their flexibility to invest along the capital structure, not just equity and management focus on finding great managers to partner with.

Many don't seem to be as excited and/or do not believe that Fairfax has the right skills: this is a personal call.

 

WRT the discount and when will it close? Listing of the airport will help but performance will be more important IMO. Mid-teens return should create demand, maybe some roadshow to raise more capital at a fair price? I have no idea.

 

I like the setup and have lots of patience. We'll see.

 

G

Edited March 13, 2023 by giulio

[giulio]

@valueinvesting101 good points.

 

BIAL growth plans were laid out in the latest letter. With the new terminal they have 2.5x more capacity. Plans are 3.5x by 2029 (70 million passengers from 20 million) and 4.5x by 2033 (90 million passengers). 

"These achievements lay the foundation for BIAL’s plans to grow non-aero revenue by five times over the next decade."

Airports are valued at 15-20x EBITDA. Not too stretched for me, but I understand your point.

 

I don't know how to find information about Chemplast parent company (or TCI sub) but these are fair questions to ask at the annual meeting.

 

1 hour ago, valueinvesting101 said:

Most of the investments made since 2018 have not generated good returns so far.

Time is on their side!

This is worth highlighting too: "Over the eight years since Fairfax India’s inception, Fairfax India has significantly outperformed the Indian markets" (AR 2022)

FIH book value per share +8.5%

US$ S&P BSE Sensex 30 +5.8%

 

G

[ICUMD]

1 hour ago, valueinvesting101 said:

I feel annual letter adds too many details not relevant for shareholders while skipping important details. 

It mentions that "The tariff order for the second control period (from April 2016 to March 2021) was finalized by AERA in August 2018, well after the control period had begun." Isn't this weird that fees to be charged for the period are determined by the regulator for the 2.5 years after the actual period has began? I hardly find things are improving markedly in India in terms of government bureaucracy if it takes 2.5 year to decide tariff to be charged. 

Annual letter fails to inform tariff order for the 3rd control period even when it has already been approved by government and came in below the amount requested by BIAL. I found omission of this detail very perplexing.  Regulator did better job of deciding new tariff for the 3rd period (Apr 2021 to March 2026) only 4 months after the period began. 

Even with new tariff for the 3rd control period, what will be the revenue for BIAL? It seems current revenue is around 200 million. Even if it doubles to 400 million, isn't airport trading at huge multiple of P/S to come up with valuation of $2.4-3 billion? 
Real estate and infrastructure development will be time consuming and tedious process in India which can easily take 3-5 years to add meaningful cash flow. 

Most of the investments made since 2018 have not generated good returns so far. Book value growth is determined to large extent by BIAL and Sanmar valuations but those valuation seems stretched. Even Sanmar investment has been done at the holding company level which also included Egyptian operation. Not sure if anyone has more insight into valuation of that Sanmar holding company and leverage at the Egyptian operation.

 

I agree 100%.  Reading between the lines, I am not convinced they have been getting their 16% promised rate of return on aero revenue via UDF reset. 

 

The value of the airport is intrinsically tied to this promise.  They would be overstating the value of the airport if it's an impaired asset, and charging performance fees on its impaired value.

 

 

 

[valueinvesting101]

As per annual letter BIAL generated ROE of 14% for 2nd control period. Not sure how relevant is 17% ROE of 1st control period when management wasn't involved. Certainly less than 16% ROE assured by regulators. 

Is comparison with S&P BSE Sensex 30 performance  appropriate for Fairfax India? Would it be better to compare results with BSE Small cap index considering size of most investments? 

BSE Small cap Index performance from 01-30-2015 to 03-13-2023 is around 8.6% with dividend reinvested. This is actual price performance which is beating price performance of Fairfax India handily and even edging privately marked book value. 
 

Edited March 13, 2023 by valueinvesting101

[modiva]

Fairfax India has ownership in 460 acres of land near the airport through BIAL.   BIAL is currently valued at $2.6B based on discounted cashflow.  The land alone could be valued at $0.5-1B, and potentially $2B once it is fully developed.  This is based on retail lot pricing and commercial value is generally higher.  Based on the current developments such as the 3D Tech Printing Facility, Taj luxury resort, Concert etc., and the vision for luxury retail, business parks, community etc. the value is reasonable.  Basically, the land alone makes up 20-40% of current value and 80% of future value.  

[ICUMD]

My understanding:

 

BIAL is the operator of the airport based on 30 year lease (which can be renewed for another 30 yrs). 

 

It does not really own either the land nor the airport.

 

The value of the land is tied to the 'non aero' cash flow it is able to generate, of which it will keep 100%.  Of course there are serious development costs.

 

This cash flow could be tremendous over the coming years if they execute wisely.

 

 

[modiva]

4 hours ago, ICUMD said:

My understanding:

 

BIAL is the operator of the airport based on 30 year lease (which can be renewed for another 30 yrs). 

 

It does not really own either the land nor the airport.

 

The value of the land is tied to the 'non aero' cash flow it is able to generate, of which it will keep 100%.  Of course there are serious development costs.

 

This cash flow could be tremendous over the coming years if they execute wisely.

 

 

Correct. By ownership, they have the right to develop and monetize the land. Higher value of the land translates to higher cash flow. 

[ICUMD]

Update on Construction of BIAL Aerocity:

 

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

[netcash1]

any news today on Bangalore IPO?  shares showing some life

[gfp]

45 minutes ago, netcash1 said:

any news today on Bangalore IPO?  shares showing some life

 

There was a large block trade (~$3.5 million, large for this security) on Friday that appeared to be initiated by the buyer (price went up).  There was also a 4,000 share insider purchase reported recently.  Not aware of any specific news but the value gap can start to close at any time unpredictably.  

[netcash1]

great color. Thank  you

[hobbit]

FIH going for IDBI

 

https://www.businesstoday.in/industry/banks/story/rbi-begins-evaluating-potential-bidders-including-kotak-mahindra-bank-csb-for-idbi-bank-report-377262-2023-04-13

[Viking]

1 hour ago, hobbit said:

FIH going for IDBI

 

https://www.businesstoday.in/industry/banks/story/rbi-begins-evaluating-potential-bidders-including-kotak-mahindra-bank-csb-for-idbi-bank-report-377262-2023-04-13

@hobbit thanks for posting. Do you have any thoughts?

1.) is IDBI worth pursuing? 
2.) what would the approximate cost be?

- my assumption is FIH would need partners.

3.) how does FIH pay for it? Without current shareholders getting thrown under the bus?

- or could they fund it by contributing CSB and cash ($300 million or so?) and parters pony up the rest?

 

Is it possible for Fairfax India to do a capital raise? With shares trading at around $13 and BV at $19? 
Or do we see Fairfax India sell some more of the companies they currently hold?

—————

Do you have any thoughts on Anchorage? Will we see something happen on this front in 2023?