Fairfax India new issue

[SafetyinNumbers]

2 hours ago, ICUMD said:

Any draw backs or advantages to shareholders of Fairfax India in the performance fee being paid in cash rather than shares?  

 

I guess we avoid dilution at these ridiculously discounted share prices! 

I think dilution would have been ~1.5% depending on how big the performance fee will end up. I think it’s also fair to say the market was expecting the shares to be issued. Both good reasons for the shares to benefit on Monday at least in the short term.
 

A lot of investors didn’t want to own the shares because of this clause. Despite it not having a material impact on investors since inception, the perspective was understandable. It will be interesting if they reconsider. That pool of investors might be big enough to close the discount materially.  That’s how the shares benefit in the long term. 
 

This move by Fairfax might generate a lot of Social Value or in FIH’s case, reduce the negative Social Value as Market Value is well below Intrinsic Value.

it’s hard to predict what will happen with NAV discounts but the narrative just got easier to sell. The stock is at new 52-week highs and there is nothing macro guys like more than strong technicals and a country bet.
 

India is flexing its strategic importance to every super power in the world. India and Indians own a lot of gold so there is some optionality that the rupee will benefit materially if gold rallies materially. Indian debt is going into the benchmark next year which should lower the cost of capital and also provide another reason for the rupee to strengthen. Oil is cheap and they buy it even cheaper.

 

2024 brings a few potential meaningful catalysts. The biggest being the IPO of Anchorage which has been taking forever. I assume part of what led to the sale of the additional 10% of BIAL to FIH were the other counterparties was not wanting to wait for a longer process and FIH willing to pay a fair price.

 

CSB Bank is reported to be bidding for a partially state-owned bank that is much bigger. I’m not sure what kind of deal structure is possible but it seems like it could have a lot of upside. CSB is up 64% this year and according to the internet has a P/E of 12. 
 

They own a lot of interesting businesses. The public stocks are going up and my bet is the private ones are marked conservatively as a group. 
 

I think the l/s hedge funds I sold too in 2003 would have been all over this story but they are all gone and there are too many ideas for those of us that are left. The discount might go back to 40% but book value could still grow pretty fast depending on how the world turns out. 
 

i’m going to trade around a core position which probably means I’ll sell too much too early and I’m elated with that outcome vs the alternative where BVPS doesn’t CAGR north of 10% which is always possible but I think unlikely. You may think otherwise.
 

 

 

[This2ShallPass]

4 hours ago, SafetyinNumbers said:

This move by Fairfax might generate a lot of Social Value or in FIH’s case, reduce the negative Social Value as Market Value is well below Intrinsic Value.

Agreed. If they deferred payment that would have been something but will take this. 82M fees still very high, 5% of market cap.

 

I would like to think all my complaining helped Surely someone there is reading a board dedicated to Fairfax..

[Haryana]

 

 

 

[TwoCitiesCapital]

1 hour ago, Haryana said:

 

 

 

 

Sentiment

 

All that has that has ever mattered. 

 

I guess it takes a pivot by the Fed more than any action Fairfax or partners could've taken. 

Edited December 18, 2023 by TwoCitiesCapital

[gfp]

I wonder if we will see this price run up in FIH was the result of Fairfax Financial using the expected cash incentive fee to acquire FIH shares in the open market.  It's sort of the best of both worlds when you have a fiduciary responsibility to both FIH and FFH shareholders.  You don't take the FIH incentive payment in dilutive discounted shares (good for FIH shareholders, bad for FFH shareholders) but you use the expected cash payment to acquire discounted FIH shares in the market, which doesn't dilute FIH shareholders (but is good for FFH shareholders).

 

I suppose we would see a filing soon if this were the case.  Seems like the best "fair and friendly" way to navigate the sticky situation of representing two different groups of shareholders simultaneously.

[ICUMD]

The Performance fee being paid in cash will reduce cash liquidity for Fairfax India

 

I presume this will impair FIH.U ability to enact share buybacks through the NCIB and acquire new companies.  

 

Do we know if FFH is buying FIH shares on the open market?

[TwoCitiesCapital]

6 minutes ago, ICUMD said:

The Performance fee being paid in cash will reduce cash liquidity for Fairfax India

 

I presume this will impair FIH.U ability to enact share buybacks through the NCIB and acquire new companies.  

 

Do we know if FFH is buying FIH shares on the open market?

 

Does it matter? We pay it in shares, dilute shareholders, but retain liquidity to potentially undo dilution pending fill prices on NCIB

 

OR

 

Avoid the dilution and whats-ifs all together and pay in cash with the possibility Fairfax bids in public markets as mentioned above

 

I'm not entirely upset about either, but my preference is absolutely for the certainty of #2 than the hopes of #1. 

 

As far as acquiring new companies? India isn't exactly cheap at the moment and the liquidity event Anchorage brings will likely take care of any intermediate term concerns you have there. 

 

All in all, I don't view less liquidity in the short term as problematic.

[ICUMD]

9 minutes ago, TwoCitiesCapital said:

 

Does it matter? We pay it in shares, dilute shareholders, but retain liquidity to potentially undo dilution pending fill prices on NCIB

 

OR

 

Avoid the dilution and whats-ifs all together and pay in cash with the possibility Fairfax bids in public markets as mentioned above

 

I'm not entirely upset about either, but my preference is absolutely for the certainty of #2 than the hopes of #1. 

 

As far as acquiring new companies? India isn't exactly cheap at the moment and the liquidity event Anchorage brings will likely take care of any intermediate term concerns you have there. 

 

All in all, I don't view less liquidity in the short term as problematic.

Completely agree.  I prefer the option they have chosen since it seems to be shareholder friendly.  Personally, it's improved my confidence in management.  Share price seems to have moved nicely since.

[glider3834]

https://www.travelandtourworld.com/news/article/blr-airport-best-domestic-airport-2023/

[glider3834]

On 12/12/2023 at 12:19 PM, ICUMD said:

I believe they have increased ownership to 54%.

Otherwise you are correct.  This is a great start.  I don't know what loans they may have taken on to fund T2 development, but the profitability allows for them to develop and refine and develop businesses within the existing physical structure.  

 

Also, will hopefully attract investors for a planned IPO under Anchorage,  marking to market this key asset.

yes T2 funded mostly with debt and to lesser extent operating cash flow over FY22 & FY23 (see below) . Going forward, Operating cash inflow /EBITDA should grow with traffic increasing. Its tricky looking at BIAL valuation through a PE lens because the reality is most of the profitability is likely to happen further out  - airport project finance naturally has significant capex upfront (to build new terminals, runways etc) & significant fixed overhead as a result with depreciation, insurances etc. So we currently have these high overhead costs spread over lower (than potential) passenger numbers  (T2 I gather is around 50% of passenger volume capacity) & so in the short term that impacts profitability (note the FY23 profit uplift was impacted by a tax benefit). As passenger numbers build over time, we should see lower fixed overhead per passenger as operating leverage comes into play.

 

 

 

 

 

Edited December 22, 2023 by glider3834

[giulio]

https://www.cnbctv18.com/market/iifl-finance-share-price-block-deal-fairfax-among-sellers-exclusive-18627871.htm

 

With bial deal and performance fee payment approaching I guess they HAD to sell something 

[ICUMD]

Seems like they would have generated about 160 M USD through the IIFL share sale.  Prior to the sale, their equity stake was about 640 M.  Not a bad way to raise capital IMO.

[hobbit]

A good proxy for BIAL valuation, GMR infra has doubled in the last few months. the only publicly listed airport conglomerate in India

https://finance.yahoo.com/quote/GMRINFRA.NS?p=GMRINFRA.NS

[ICUMD]

@hobbit great find. Thank you for sharing. Now if they can just get around to listing Anchorage!

[hobbit]

5 hours ago, ICUMD said:

@hobbit great find. Thank you for sharing. Now if they can just get around to listing Anchorage!

You can read more about it at the following link. they also talk about anchorage more time to time as a comparable

 

https://investor.gmrinfra.com

Edited January 10 by hobbit

[Haryana]

https://economictimes.indiatimes.com/news/india/indias-big-advantage-is-that-two-thirds-of-the-economy-is-consumer-oriented-says-fairfax-boss-prem-watsa/articleshow/106711744.cms

[

India's big advantage is that two-thirds of the economy is consumer-oriented, says Fairfax boss Prem Watsa

Fairfax has invested $7 billion in India, he said. "In next five years, we are looking at doubling that. We got a few projects already that we're working on," Watsa said. However, for India to remain an attractive investment destination, continuity will be key, he said.

]

[Haryana]

https://economictimes.indiatimes.com/news/company/corporate-trends/indians-can-dream-now-the-potential-is-enormous-prem-watsa-chairman-fairfax-financial-holdings/articleshow/106716893.cms

"

We are thinking long term right . 10 to 20 years. We have 25 million capacity in T1, 25 million in T2 and we are thinking that 25 million in T2 goes to 50 million. And then we have the possibility of a third terminal to take it to 100 million capacity.

The metro is already being built in Bangalore. The structure is quite impressive. And the airport city in Bangalore which is 450 acres. We want to be able to manage build and construct more airports in India because we have shown we can do  ..
"

 

Edited January 11 by Haryana

[alpha]

Good Interview Haryana

 

Anyone have thoughts on Sanmar? The Q3 valuation seems odd considering Lubrizol moved forward with construction of the largest PVC plant in India back in October.

[ICUMD]

2023: 35% Increase in BIAL Passenger Volumes

 

37 Million

 

https://m.economictimes.com/industry/transportation/airlines-/-aviation/passenger-traffic-at-bangalore-international-airport-jumps-35-3-pc-to-37-2-mn-in-2023/articleshow/106780001.cms

[gfp]

Modi recently inaugurated a new global engineering and technology campus for Boeing directly next to Kempegowda Intl. Airport in Bangalore.  I don't think this is on land owned by Anchorage but it is directly next to the airport, which seems like another positive for the investment.  

 

https://timesofindia.indiatimes.com/india/pm-modi-inaugurates-boeings-largest-campus-outside-us-in-bengaluru/articleshow/106985702.cms?from=mdr&from=mdr

 

 

[ICUMD]

26 minutes ago, gfp said:

Modi recently inaugurated a new global engineering and technology campus for Boeing directly next to Kempegowda Intl. Airport in Bangalore.  I don't think this is on land owned by Anchorage but it is directly next to the airport, which seems like another positive for the investment.  

 

https://timesofindia.indiatimes.com/india/pm-modi-inaugurates-boeings-largest-campus-outside-us-in-bengaluru/articleshow/106985702.cms?from=mdr&from=mdr

 

 

Definitely liking how the airport area is developing.  Looks like Boeing campus is in good proximity to KFC!

[netcash1]

Athens Airport pricing - good comp for BIAL

 

MILAN, Jan 25 (Reuters Breakingviews) - Greece is taking a prudent approach on its most emblematic courting of the equities market since its 2009 debt crisis. Athens International Airport (AIA), 55%-controlled by the Greek state, has won approval to offer 30% of its stock at between 7 euros and 8.2 euros a share, implying a market capitalisation of between 2.1 billion euros and 2.4 billion euros. With net debt of 405 million euros at the end of September and 460 million euros in cash dividends due to investors pre-IPO between then and now, the airport operator should command an enterprise value of around 3.3 billion euros.

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That is not excessive. At 7.6 times its annualised 2023 EBITDA of around 430 million euros, AIA’s valuation looks cheap in comparison with average trailing multiples of around 11 for the industry, per Breakingviews calculations based on LSEG data. That should ensure a smooth market takeoff. Existing shareholders will in any case walk away happy: generous pre-IPO dividends should ensure the Greek government takes home up to 1.2 billion euros with the sale, while keeping a toe in the airport company. (By Lisa Jucca)  

[MMM20]

On 12/19/2023 at 9:54 AM, gfp said:

 

I wonder if we will see this price run up in FIH was the result of Fairfax Financial using the expected cash incentive fee to acquire FIH shares in the open market.

this was posted Dec 13th - might explain some of the move? https://www.valueinvestorsclub.com/idea/FAIRFAX_INDIA_HLDGS_CORP/5333839892 

[ICUMD]

1 hour ago, MMM20 said:

this was posted Dec 13th - might explain some of the move? https://www.valueinvestorsclub.com/idea/FAIRFAX_INDIA_HLDGS_CORP/5333839892 

@MMM20 Unable to access the file.

 

Are you able to summarize the punch line?

Thx!

 

[gfp]

edit: This is the VIC post, not my own work.  It seems like it was written by 

https://www.linkedin.com/in/rajpgokul/?originalSubdomain=in

----------------------------------------------------------------------------------------------

Description

 

Fairfax India - Solid portfolio of investments available at a 40%+ discount to NAV !

 

Elevator Pitch:

 

Fairfax India has a portfolio of growth businesses trading at reasonable valuations. The IPO of Bangalore airport (largest asset in the portfolio) would be a key catalyst in the next 2 years and will show how attractively it has been marked by the management. The fee structure is exorbitant (2/20 structure like a PE fund), but a mix of factors (entry discount, share buybacks, cheap leverage etc) will allow investors to get similar (if not better) returns as the underlying growth in NAV (~15% expected CAGR over the next 5 years). 

 

Investment Thesis:

 

Fairfax India owns 59% of the Bangalore airport after the recent acquisition of 10% additional stake from Siemens. This is the crown jewel of Fairfax India and pretty much equates to 1.6 billion USD in value. This would translate into 85% of the current market cap and 54% of overall NAV/ Book value. Thus, a bet on Fairfax India is a bet on Bangalore airport, at least in the next 3-5 year time frame. 

 

Bangalore Airport:

 

Bangalore Airport is an extremely attractive asset to own. I believe that the true discovered value of the airport in a domestic IPO process would be upwards of 4 billion USD compared with the management’s mark of 2.7 billion USD. The reason for the conservative marking of the asset would be due to the recent transaction of Fairfax India buying 10% stake from Siemens around these levels. In my view, Siemens was an uneconomic seller (they got this stake in return for building the asset in 2007) and Fairfax India was able to get an attractive deal for themselves.

 

In 2019, Fairfax was able to sell part of the Bangalore airport to OMERS at a similar valuation to the current mark. The peer valuations of other Indian airports are 3X higher now than 4 years back. The Bangalore airport would have a rousing welcome in Indian markets and be bid up by domestic investors as high quality long duration assets which benefit from urban consumption growth are rare. 

 

Bangalore has been India’s fastest growing city for the last 2-3 decades (not only in India, but globally as well) and is well exposed to secular trends like technology, electronics manufacturing etc to drive further growth. The Bangalore airport has the concession until 2068 (almost 45 years from now). The airport when opened was far outside the city, but the city continues to develop towards the airport with multiple infrastructure projects to connect the airport with the city. The airport within the next 3 years would be well connected by Metro and Suburban trains in addition to the strong road infrastructure that has already been built. This is important as the airport has almost 460 acres of land that it can develop and lease. 

 

The airport has a regulated ROE of 16% on passenger fees and then unregulated income from retail, advertising, parking rentals, etc. Within the Indian airport space, Delhi was amongst the first airports that went to private hands. As per their last results, the regulated passenger revenue was just 1/3rd of the total revenues and the remaining 2/3rd was from unregulated sources (Land rental & retail - 33%, Duty Free & F/B - 19%, Parking & Ads - 6% and Others - 8%). This shows that an investment in the airport is a bet on the discretionary consumption trend of Bangalore. As India gets richer and more Indians travel and spend money on retail/ F&B etc, Bangalore airport will achieve higher operating leverage and profits will grow exponentially.  That is a no brainer bet from a 10-20 year view (FWIW, I live in the suburbs of Bangalore and have absolute conviction on the city’s growth). 

 

The airport has been growing passenger volumes at double digit rate over the last 10 years and we can expect the same going forward as well. Bangalore airport is expected to achieve full capacity by 2030 with almost 90 million yearly passengers. To put that in perspective, London’s Heathrow in 2019 (pre-COVID peak) flew 80 million passengers. The city is expected to start searching for land for a 2nd airport within the next few years as it continues to grow (current population is 13 million people). 

 

The absolute valuation of 2.6 billion USD for Bangalore airport looks attractive from a general thumb check across similar assets in India and globally. The management uses the following conservative inputs to calculate their value. 

 

 

From the private filings of the Bangalore airport, the approximate data points are as follows:

 

 

The airport opened its new Terminal 2 last year and that creates accounting entries that are difficult to normalise. Also, there are certain tax writebacks that make it difficult to analyse the true earnings power. Indian passenger traffic has smartly recovered from COVID and 2024 and 2025 should be good years for the airport. 

 

Public Equity Portfolio:

 

Fairfax India has a public equity portfolio that as of today is equivalent to 1.25 billion USD. The major value in this comes from IIFL group and CSB Bank (almost 1 billion USD). 

 

We are bullish on IIFL Finance (largest position in our global portfolio and we own around 1.5% of the firm). The group is run by a wonderful owner-operator who understands capital efficiency and shareholder value creation. The stock trades at <10X earnings and 2.3X price to book with ROE and growth of 20%+. 

 

We don’t own CSB Bank directly, but it is a well run mid sized bank with a good management team that wants to scale up the business 10 fold over the next decade. The stock trades at 12X earnings and <2X book value with a healthy 18% ROE. 

 

The rest of the portfolio (IIFL securities, 5 Paisa, Fairchem Organics etc) are good businesses that are trading at reasonable valuations. There are no large valuation or growth risks that I see in their public portfolio. 

 

Private Portfolio:

 

The largest allocations in the private portfolio outside of Bangalore airport are Sanmar (300 million USD) and NSE (176 million USD). Fairfax has investments in the holding company of Sanmar in line with the promoter family, but majority of the underlying value of the group is in the listed firm - Chemplast Sanmar. You can see from the market cap of the listed firm that the marking of the holding asset is reasonable. Fairfax’s indirect holding of the listed firm is approximately worth 220 million USD and the group has other large assets outside the listed firm in Egypt. Another way to check their valuation is that the pro-forma profit before tax of Sanmar for Fairfax’s stake was 39 million USD in 2022 (7.7X multiple on 2022 PBT). 

 

NSE is India’s largest stock exchange and should have a listing over the next few years. The exchange has been growing leaps and bounds with increasing equity participation in the country. It is a good asset that we should be happy to own for the next decade (marked at 19X 2022 earnings). The unlisted shares change hands currently at 25%+ higher than the valuation assigned by Fairfax team. 

 

The rest of the private portfolio is worth 350 million USD that is spread over 6-7 businesses. I don't have any strong views on them and are not material to our thesis. 

 

Valuation & other factors:

 

The stock is trading at less than 60% of the underlying portfolio and I believe that is a large discount despite the high fee structure. The firm has been buying back shares (along with the parent Fairfax Financial) and the shares outstanding has reduced by 1.25% this year (they have retired 11% of outstanding shares in the last 5 years). I expect the share buybacks to accelerate as we get closer to the Bangalore airport IPO. The net debt is around 400 million USD, but has a 5 year tenure with 5% fixed cost. 

 

While the discount can theoretically widen even further from current levels, I believe that the current discount of 40% is on the higher end and the management can buy back shares aggressively if it persists (especially once the Bangalore airport listing gives them more liquidity). There are multiple levers of shareholder returns in Fairfax India - NAV compounding, discount narrowing, share buybacks etc. 

 

The biggest catalyst for the idea continues to be the expected IPO of the Bangalore airport. If the IPO doesn’t happen, then it is equivalent to paying a PE fund a 2/20 fee structure to get access to a good private deal (positive is that we are buying it at a 40% discount). So, the overall Risk-Reward looks attractive to us. 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 

Bangalore Airport IPO, Share Buybacks

Edited January 29 by gfp