Fairfax India new issue

[ICUMD]

Hopefully they offer a SIB in the next 6-8 months.

[This2ShallPass]

"company estimated the fair value of its investment in Sanmar common shares using: (i) a discounted cash flow analysis for Sanmar Egypt, based on multi-year free cash flow forecasts with an assumed after-tax discount rate of 11.0% and a long term growth rate of 3.0% (December 31, 2022 - 13.2% and 3.0%, respectively); and (ii) the unadjusted bid price of Chemplast's common shares. 

 

At September 30, 2023 the company held a 42.9% equity interest in Sanmar (December 31, 2022 - 42.9%) and its internal valuation model indicated that the fair value of the company's investment in Sanmar was $301,293 (December 31, 2022 - $337,846)"

 

From Q3 report. Sanmar = Sanmar Egypt management valuation + Sanmar India market valuation. As of Sep 30, 23, market value of Fairfax's 43% Sanmar India share was $396M. Based on above, then looks like Egypt is valued at -$95M. Is this correct?

 

[This2ShallPass]

"the company estimated the fair value of its investment in Jaynix using a discounted cash flow analysis based on multi-year free cash flow forecasts with an assumed after-tax discount rate of 28.2% and a long term growth rate of 1.5% (December 31, 2022 - 21.6% and 1.5% respectively)."

 

Why bother investing in a sector where you need to have a 30% discount rate and 1.5% growth rate? That too invested only $32M (though fair value now is $45m). These small investments are a head scratcher and is a distraction for management.

 

[MMM20]

6 hours ago, This2ShallPass said:

Why bother investing in a sector where you need to have a 30% discount rate

Well if it works you should make that 30% required return or something like 15x over a decade, right? 

[SafetyinNumbers]

7 hours ago, This2ShallPass said:

"the company estimated the fair value of its investment in Jaynix using a discounted cash flow analysis based on multi-year free cash flow forecasts with an assumed after-tax discount rate of 28.2% and a long term growth rate of 1.5% (December 31, 2022 - 21.6% and 1.5% respectively)."

 

Why bother investing in a sector where you need to have a 30% discount rate and 1.5% growth rate? That too invested only $32M (though fair value now is $45m). These small investments are a head scratcher and is a distraction for management.

 

If the current discount rate is too high. Then the present value is significantly higher. Maybe they don’t want to write up a discount purchase too quickly. They increased the discount rate by ~7% since the end of last year and are still up ~40%. 
 

Why do you think it’s a distraction for management?

[This2ShallPass]

1 hour ago, SafetyinNumbers said:

Why do you think it’s a distraction for management?

I have no idea what the strategy for Fairfax India is. Last year they bought 2 <$50M companies and this year going for a whale like IDBI. 

 

Jaynix is a total distraction, how long will it take for a 1.5% grower sub $50M investment in a highly risky sector to move the needle..

[SafetyinNumbers]

17 minutes ago, This2ShallPass said:

I have no idea what the strategy for Fairfax India is. Last year they bought 2 <$50M companies and this year going for a whale like IDBI. 

 

Jaynix is a total distraction, how long will it take for a 1.5% grower sub $50M investment in a highly risky sector to move the needle..

That’s a terminal growth rate. The most it could be is nominal GDP. Presumably the forecast period growth rate is a lot higher or the current valuation is incredibly cheap. Maybe both. To call it a distraction implies the analysts and PMs don’t have to time to analyze the company. 

[Haryana]

Likely be fine with them taking 10 tiny positions if even just 3 of them become home runs.

 

National Stock Exchange was also a tiny position until we got it in the rear view mirror.

 

Jaynix and Maxop are likely to benefit from expected boom in manufacturing over decades.

 

[dartmonkey]

Likely be fine with them taking 10 tiny positions if even just 3 of them become home runs.

 

National Stock Exchange was also a tiny position until we got it in the rear view mirror.

 

 

They wanted this one to be much bigger - they bought 1% in 2016 for $26.8m and said this in the 2016 Annual Report:

 

Since Indian regulations mandated that no single shareholder (other than the two founding shareholders who each own about 10%) could own more than 5%, Fairfax India decided to buy a 5% position in NSE. The position had to be accumulated from several institutional shareholders who were interested in selling. After accumulating about 1% by July2016 and while in the process of negotiating the purchase of another 3% block, strong rumours broke again that the much-anticipated public listing of NSE was about to be announced. As a result of the rumours, the potential sellers walked away. Fairfax India therefore decided to suspend its efforts to purchase the remainder of the 5% position. 

 

The position is worth $177m, as of Sept 30, 2023. 5% would have been worth $885m; Fairfax India all told is worth $1.79b...

[TwoCitiesCapital]

On 11/3/2023 at 2:36 PM, Haryana said:

Let us say there are 100 shares with value 21 and price 13.

 

They buyback 2.5 shares paying 13 each for a total of 32.5.

 

Now they are left with equity of 2100-32.5 and 97.5 shares.

 

New BVPS is 2067.5/97.5=~21.21, so yeah just about 1% gain.

 

 

On 11/3/2023 at 2:00 PM, vinod1 said:

 

Don't see how you are getting a 4% BV growth. If 2.5% of the shares are reduced each year at 0.65x BV, then you are gaining IV of about 0.35 per share of BV x 2.5% of shares. This should result in about a 0.9% gain in BV (0.35 x 2.5) for remaining shares.

Vinod

 

You guys are right. I wasn't subtracting out the capital used to buy the shares and messed up the math. 

 

My bad

 

 

[This2ShallPass]

8 hours ago, SafetyinNumbers said:

To call it a distraction implies the analysts and PMs don’t have to time to analyze the company. 

Distraction to me is taking time away from what's important. The extension of your argument is they can analyze a 1000 companies. What's the upside case for Jaynix, quantify in terms of per share impact to Fairfax India. The risk is very high by their own admission. So does this upside scenario adequately compensate for the risk?

 

More importantly, what is their strategy? Why buy small one year and go really big the next? If you read their quarterly report, it's clear they have bunch of smaller companies that are middling at best. Sanmar, their other large holding, is not doing that great ($34M reduction in valuation this q). One of the IIFL companies was reprimanded for fraud by SEBI, looks like they are now rebranded as 360 One.

 

I feel due to the halo effect of parent Fairfax and BIAL, we're giving a pass to overall Fairfax India portfolio. Why am I still here? I'll be honest, it's a lot of FOMO and waiting for Anchorage IPO. I'm afraid of waiting patiently since the beginning and missing out just before BIAL valuation starts to really take off (this quarter it's up >10%). I'll be out of Fairfax India soon after the IPO..

 

 

[SafetyinNumbers]

40 minutes ago, This2ShallPass said:

Distraction to me is taking time away from what's important. The extension of your argument is they can analyze a 1000 companies. What's the upside case for Jaynix, quantify in terms of per share impact to Fairfax India. The risk is very high by their own admission. So does this upside scenario adequately compensate for the risk?

 

More importantly, what is their strategy? Why buy small one year and go really big the next? If you read their quarterly report, it's clear they have bunch of smaller companies that are middling at best. Sanmar, their other large holding, is not doing that great ($34M reduction in valuation this q). One of the IIFL companies was reprimanded for fraud by SEBI, looks like they are now rebranded as 360 One.

 

I feel due to the halo effect of parent Fairfax and BIAL, we're giving a pass to overall Fairfax India portfolio. Why am I still here? I'll be honest, it's a lot of FOMO and waiting for Anchorage IPO. I'm afraid of waiting patiently since the beginning and missing out just before BIAL valuation starts to really take off (this quarter it's up >10%). I'll be out of Fairfax India soon after the IPO..

 

 

I think their goal is long term capital appreciation investing in India. They are expected value investors so they have a bunch of different bets most of which have worked out very well while some haven’t. It’s kind of what one would expect in an opportunistic portfolio. I run my portfolio similarly so maybe I’m not as bothered by it as you are.
 

I think the IPO will finally give FIH a low cost of capital to use as currency for acquisitions which might accelerate growth as they have been capital starved since the last secondary in 2017. If most are sellers like you then maybe the discount won’t close.

[vinod1]

Investors are in this because they are expecting 15%+ returns. Prem himself mentioned I think they would not be investing in India if they did not think they can make 20% (OK, that is Prem being Prem  ).

 

Paying 1.5% + 20% performance over 5%, would seem perfectly reasonable for most of these investors when returns are north of 15%.

 

Realized returns are 8.5%. Worse, these are investors who went to emerging markets seeking higher returns and they find S&P 500 had much higher returns. 

 

Now, they feel stupid for paying the performance fee. So they are going to capitalize the costs and discount it. Hence, the discount to BV.

 

I dont think the discount would close unless

 

1) Fairfax India starts generating 15% annual returns, or

 

2) Fairfax India vastly outperforms US stocks, even if absolute performance does not reach 15%. Investors would be flocking to these non-US alternatives in that case.

 

Vinod

[ICUMD]

26 minutes ago, vinod1 said:

Investors are in this because they are expecting 15%+ returns. Prem himself mentioned I think they would not be investing in India if they did not think they can make 20% (OK, that is Prem being Prem  ).

 

Paying 1.5% + 20% performance over 5%, would seem perfectly reasonable for most of these investors when returns are north of 15%.

 

Realized returns are 8.5%. Worse, these are investors who went to emerging markets seeking higher returns and they find S&P 500 had much higher returns. 

 

Now, they feel stupid for paying the performance fee. So they are going to capitalize the costs and discount it. Hence, the discount to BV.

 

I dont think the discount would close unless

 

1) Fairfax India starts generating 15% annual returns, or

 

2) Fairfax India vastly outperforms US stocks, even if absolute performance does not reach 15%. Investors would be flocking to these non-US alternatives in that case.

 

Vinod

With the bulk of Fairfax India's valuation tied up in BIAL, a private company, there is no way of knowing if we are or are not ahieving that 15% compounded return.  BV is only an estimate.  

 

Value will be unlocked only if Anchorage goes public or there is a SIB and Fairfax offers a fair price per share.

 

Having said that, the share price performance over the last year or so wasn't bad considering the markets.  We were impaired due to COVID affecting air travel.  Hopefully 2024 offers some opportunity for fair exit of those interested in pursuing other opportunities.

[This2ShallPass]

On 11/7/2023 at 5:43 AM, vinod1 said:

Paying 1.5% + 20% performance over 5%, would seem perfectly reasonable for most of these investors when returns are north of 15%

Performance fee is much worse. Calculated with BV and paid in discounted shares. For this perf period, Fairfax is going to get 60% more shares. Say Fairfax should get $1M in perf fee as an example - they should have got only 47k shares but will get 77k!!

 

Minority investors are getting fleeced, no way around it. Either they should start a SIB before Dec to close the gap somewhat (not going to happen) or this adds to the other cases of them treating minority investors poorly.

 

[SafetyinNumbers]

28 minutes ago, This2ShallPass said:

Performance fee is much worse. Calculated with BV and paid in discounted shares. For this perf period, Fairfax is going to get 60% more shares. Say Fairfax should get $1M in perf fee as an example - they should have got only 47k shares but will get 77k!!

 

Minority investors are getting fleeced, no way around it. Either they should start a SIB before Dec to close the gap somewhat (not going to happen) or this adds to the other cases of them treating minority investors poorly.

 

The original institutional investors (OMERS, Fidelity and Markel, I think) who negotiated this deal on behalf of minority shareholders are the ones who have let us down. In theory, they were counting on themselves to be buying to close the discount every three years to avoid this dilution. Unfortunately, the key decision makers are probably out of their jobs and there isn’t any capital for stocks outside their benchmark. 
 

This is the first performance period where it’s meaningful so let’s see what they do. FWIW, they have bought more than enough stock back at lower or similar prices to offset the dilution but I think most people think about it like you do.

[glider3834]

2 hours ago, SafetyinNumbers said:

The original institutional investors (OMERS, Fidelity and Markel, I think) who negotiated this deal on behalf of minority shareholders are the ones who have let us down. In theory, they were counting on themselves to be buying to close the discount every three years to avoid this dilution. Unfortunately, the key decision makers are probably out of their jobs and there isn’t any capital for stocks outside their benchmark. 
 

This is the first performance period where it’s meaningful so let’s see what they do. FWIW, they have bought more than enough stock back at lower or similar prices to offset the dilution but I think most people think about it like you do.

 

3 hours ago, This2ShallPass said:

Performance fee is much worse. Calculated with BV and paid in discounted shares. For this perf period, Fairfax is going to get 60% more shares. Say Fairfax should get $1M in perf fee as an example - they should have got only 47k shares but will get 77k!!

 

Minority investors are getting fleeced, no way around it. Either they should start a SIB before Dec to close the gap somewhat (not going to happen) or this adds to the other cases of them treating minority investors poorly.

 

I think Fairfax can only take perf fee in shares up to 49% ownership

'In no instance will Subordinate Voting Shares be issued to satisfy the Performance Fee if, after such issuance, Fairfax and its affiliates would own more than 49% of the outstanding equity capital of the Company on the date of issuance.'

[SafetyinNumbers]

6 hours ago, glider3834 said:

 

I think Fairfax can only take perf fee in shares up to 49% ownership

'In no instance will Subordinate Voting Shares be issued to satisfy the Performance Fee if, after such issuance, Fairfax and its affiliates would own more than 49% of the outstanding equity capital of the Company on the date of issuance.'

And they are at about 43% now? Does that make it less of an issue for you @This2ShallPass?

[This2ShallPass]

1 hour ago, SafetyinNumbers said:

Does that make it less of an issue for you

 It definitely helps:) Thanks for that info @glider3834

 

I'm still hoping to see some gesture from Fairfax, acknowledge they probably didn't envision a scenario of 40% discount to shares and willing to do the right thing (the extra money or shares will not be a big difference to them).

 

The more I think about it, I'm wondering if I should switch my FF India to FF. Next 2 years are going to be great for Fairfax. FF India though needs that one catalyst (IPO) and with India Canada spat, approvals might be delayed. So maybe worth a chance and even when the IPO is announced the stock might not move up quickly, giving enough time to get back. Thoughts?

 

 

[LC]

I still keep a handful of FF India shares but I moved the bulk to Fairfax in the 790s.

 

FF India seems like a mixed bag at the moment- some great assets, India growth story, but mixed with bad Canadian politics and suboptimal incentive structure.

[Xerxes]

32 minutes ago, This2ShallPass said:

The more I think about it, I'm wondering if I should switch my FF India to FF. Next 2 years are going to be great for Fairfax. FF India though needs that one catalyst (IPO) and with India Canada spat, approvals might be delayed. So maybe worth a chance and even when the IPO is announced the stock might not move up quickly, giving enough time to get back.

@This2ShallPass

 

this too shall pass

[This2ShallPass]

On 11/8/2023 at 9:07 PM, This2ShallPass said:

The more I think about it, I'm wondering if I should switch my FF India to FF.

I sold 20% yesterday. Maybe this is the catalyst you all needed  It was opportunistic as Seritage (SRG) had some positive news that I discuss more on that board and decided to add to that position. 

 

This is a reminder to me also why writing helps (I don't do it as much). As I wrote down my thoughts it was clear FF could get 60% more shares and that convinced me it's very unlikely for the discount to close.

[villainx]

I know it was previously discussed up thread but FFXDF isn't a PFIC but may be designated as such?

 

And in any case, I can buy FFXDF in either traditional or ROTH IRA and don't have to worry if it is or isn't PFIC?

 

I just bought some in my individual account and basically sold it a couple of hours later because I found out about potential PFIC issue. 

[SafetyinNumbers]

11 minutes ago, villainx said:

I know it was previously discussed up thread but FFXDF isn't a PFIC but may be designated as such?

 

And in any case, I can buy FFXDF in either traditional or ROTH IRA and don't have to worry if it is or isn't PFIC?

 

I just bought some in my individual account and basically sold it a couple of hours later because I found out about potential PFIC issue. 

I think it was confirmed to be a PFIC.

[TwoCitiesCapital]

On 11/20/2023 at 6:13 PM, villainx said:

I know it was previously discussed up thread but FFXDF isn't a PFIC but may be designated as such?

 

And in any case, I can buy FFXDF in either traditional or ROTH IRA and don't have to worry if it is or isn't PFIC?

 

I just bought some in my individual account and basically sold it a couple of hours later because I found out about potential PFIC issue. 

 

I'm not a tax professional - 

 

But was my understanding PFIC designation is unimportant for those who hold in IRAs/Roth IRAs.