Fairfax India new issue

[TwoCitiesCapital]

Did I miss some major headline or something? Up 15% today?

[tradevestor]

Interview with Prem Watsa over the weekend, maybe:

 

https://economictimes.indiatimes.com/markets/expert-view/i-see-money-coming-into-india-left-right-and-centre-prem-watsa/articleshow/70941492.cms

 

https://economictimes.indiatimes.com/news/economy/finance/fairfax-to-invest-5-billion-more-in-india-in-next-5-years/articleshow/70942015.cms

[TwoCitiesCapital]

Interview with Prem Watsa over the weekend, maybe:

 

https://economictimes.indiatimes.com/markets/expert-view/i-see-money-coming-into-india-left-right-and-centre-prem-watsa/articleshow/70941492.cms

 

https://economictimes.indiatimes.com/news/economy/finance/fairfax-to-invest-5-billion-more-in-india-in-next-5-years/articleshow/70942015.cms

 

Doubtful. It opened near flat. Only been the last 2-3 hours that it's rocketed higher. The only India related headline I've seen has been speculation that India is joining the global recession - nothing to send this bad boy up 15%.

 

Was hoping it'd continue to trend lower so I could buy more :/

[elliott]

I struggle to understand all the businesses in detail, but believe in the long-term India story, and hope that Fairfax should be in place to benefit.

 

Asian Airports can be fine businesses (Shanghai International is a case in point at the moment), but I don't know enough about the Bengaluru management to feel confident about how how well they'll execute the expansion.  I'm sure I just need to sit down and research more.

 

The Finechem chemicals business had a decent reputation (so I heard, but not from primary research) before Fairfax got involved.

 

Stock exchanges are great businesses I think if you believe in long-term capitalism.

 

I need to do a lot more work, but overall the sectors they've gone into look very appealing.

 

Having said that, don't forget there are a heap load of well-run family companies in India to choose from - it's not tricky to create a small basket, or find a fund manager who knows what they're doing.

 

One thing I am noting from the latest filing is Sanmar common equity went from 554 (million Indian rupees) to 208,854. There is a section that gives reasoning but it is a 376 fold increase in a quarter and holds up the shareholder equity and book value per share in the bottom line for the year and the quarter. How does such a dramatic increase work out?

 

https://s1.q4cdn.com/293822657/files/doc_financials/quarterly_reports/2018/2018-Q3-Interim-Report-(FIH)-(Final).pdf

"Sanmar Common Shares

At September 30, 2018 the company estimated the fair value of its investment in Sanmar common shares using a discounted cash flow analysis based on multi-year free cash flow projections with assumed after-tax discount rates ranging from 13.4% to 16.6% and long term growth rates ranging from 3.0% to 4.0% (December 31, 2017 - 15.2% to 19.5% and 2.0% to 3.6%, respectively). Free cash flow projections were based on EBITDA estimates derived from financial information for Sanmar's four business units (with additional financial information and analysis completed for Chemplast's underlying business units involved in new capital projects) prepared in the third quarter of 2018 by Sanmar's management. Discount rates were based on the company's assessment of risk premiums to the appropriate risk-free rate of the economic environment in which Sanmar operates. In the third quarter of 2018 Fairfax India recorded unrealized gains of $225,013 on its investment in Sanmar common shares primarily as a result of: (i) positive operational developments at Sanmar Egypt (successful completion of its increased capacities in Egypt) and Chemplast (will benefit from the completion of new capital projects); (ii) continued strong demand for PVC and related products in India, Europe, the Middle East and North Africa; and (iii) the decrease in the after-tax discount rates (principally related to the decreased risk at Sanmar Egypt as a result of the completion of its capital expenditure project to increase capacity). At September 30, 2018 the company's internal valuation model indicated that the fair value of the company's investment in Sanmar common shares was $208,854 (December 31, 2017 - $556). The changes in fair value of the company's investment in Sanmar common shares for the third quarters and first nine months of 2018 and 2017 are presented in the tables disclosed earlier in note 5."

 

Didn’t Sanmar repay a big loan to FFH? My recollection was the original equity investment was valued almost at 0 and most of the financing was the loan, so when the company repaid the loan the equity value will have risen dramatically.

 

I am not sure that can be the reason. Fairfax India reports loans and stocks separately. Indeed, the report for that year included another, specific, line for the loan to Sanmar. Additionally, FIH explained the reason for the difference; more specifically, it provided three reasons. None of them related to the loan.

But maybe I am not understanding you correctly, and what you mean is that part of the loan was repaid, and that repayment was in kind, actually, stocks. There is actually some comments that might point to that, but then why did the loan line "Sanmar bonds" not decrease accordingly? It actually increased...

Jan 1, 2018 - Dec 31, 2018

Sanmar equity: 556 - 217,000 (increase classified as net change in unrealized gains on investments)

Sanmar bonds: 333,000 - 392,000 (increase classified as net change in unrealized gains on investments 60,000, and net unrealized currency translation loss (30,000))

 

EDIT Well, apparently the bonds were a very good investment, and the amount Sanmar owed to FIH at their maturity was ca $600,000 From that we can easily see how "Sanmar equity" increased to $200,000 even when "Sanmar bonds" did also increase by ca $100,000 Chapeaux for FIH

 

[no_free_lunch]

Stupid question.  Is FIH-U.TO listed in USD or CAD?

[gokou3]

Stupid question.  Is FIH-U.TO listed in USD or CAD?

 

Listed and quoted in USD on the TSX.  They report in USD as well.

[no_free_lunch]

Thank you gokou3.  I bought a starter position and saw it was pulling from my USD balance.  Based on what you have described it makes sense.

[petec]

I struggle to understand all the businesses in detail, but believe in the long-term India story, and hope that Fairfax should be in place to benefit.

 

Asian Airports can be fine businesses (Shanghai International is a case in point at the moment), but I don't know enough about the Bengaluru management to feel confident about how how well they'll execute the expansion.  I'm sure I just need to sit down and research more.

 

The Finechem chemicals business had a decent reputation (so I heard, but not from primary research) before Fairfax got involved.

 

Stock exchanges are great businesses I think if you believe in long-term capitalism.

 

I need to do a lot more work, but overall the sectors they've gone into look very appealing.

 

Having said that, don't forget there are a heap load of well-run family companies in India to choose from - it's not tricky to create a small basket, or find a fund manager who knows what they're doing.

 

One thing I am noting from the latest filing is Sanmar common equity went from 554 (million Indian rupees) to 208,854. There is a section that gives reasoning but it is a 376 fold increase in a quarter and holds up the shareholder equity and book value per share in the bottom line for the year and the quarter. How does such a dramatic increase work out?

 

https://s1.q4cdn.com/293822657/files/doc_financials/quarterly_reports/2018/2018-Q3-Interim-Report-(FIH)-(Final).pdf

"Sanmar Common Shares

At September 30, 2018 the company estimated the fair value of its investment in Sanmar common shares using a discounted cash flow analysis based on multi-year free cash flow projections with assumed after-tax discount rates ranging from 13.4% to 16.6% and long term growth rates ranging from 3.0% to 4.0% (December 31, 2017 - 15.2% to 19.5% and 2.0% to 3.6%, respectively). Free cash flow projections were based on EBITDA estimates derived from financial information for Sanmar's four business units (with additional financial information and analysis completed for Chemplast's underlying business units involved in new capital projects) prepared in the third quarter of 2018 by Sanmar's management. Discount rates were based on the company's assessment of risk premiums to the appropriate risk-free rate of the economic environment in which Sanmar operates. In the third quarter of 2018 Fairfax India recorded unrealized gains of $225,013 on its investment in Sanmar common shares primarily as a result of: (i) positive operational developments at Sanmar Egypt (successful completion of its increased capacities in Egypt) and Chemplast (will benefit from the completion of new capital projects); (ii) continued strong demand for PVC and related products in India, Europe, the Middle East and North Africa; and (iii) the decrease in the after-tax discount rates (principally related to the decreased risk at Sanmar Egypt as a result of the completion of its capital expenditure project to increase capacity). At September 30, 2018 the company's internal valuation model indicated that the fair value of the company's investment in Sanmar common shares was $208,854 (December 31, 2017 - $556). The changes in fair value of the company's investment in Sanmar common shares for the third quarters and first nine months of 2018 and 2017 are presented in the tables disclosed earlier in note 5."

 

Didn’t Sanmar repay a big loan to FFH? My recollection was the original equity investment was valued almost at 0 and most of the financing was the loan, so when the company repaid the loan the equity value will have risen dramatically.

 

I am not sure that can be the reason. Fairfax India reports loans and stocks separately. Indeed, the report for that year included another, specific, line for the loan to Sanmar. Additionally, FIH explained the reason for the difference; more specifically, it provided three reasons. None of them related to the loan.

But maybe I am not understanding you correctly, and what you mean is that part of the loan was repaid, and that repayment was in kind, actually, stocks. There is actually some comments that might point to that, but then why did the loan line "Sanmar bonds" not decrease accordingly? It actually increased...

Jan 1, 2018 - Dec 31, 2018

Sanmar equity: 556 - 217,000 (increase classified as net change in unrealized gains on investments)

Sanmar bonds: 333,000 - 392,000 (increase classified as net change in unrealized gains on investments 60,000, and net unrealized currency translation loss (30,000))

 

EDIT Well, apparently the bonds were a very good investment, and the amount Sanmar owed to FIH at their maturity was ca $600,000 From that we can easily see how "Sanmar equity" increased to $200,000 even when "Sanmar bonds" did also increase by ca $100,000 Chapeaux for FIH

 

On the face of it you're right and my comment was dumb (if they paid off ther loan with cash on hand, which is what I was thinking, it would have no impact on BV. D'oh).

 

Wopuld need to go back and look closely to ascertain the answer but one thought is that IIRC the terms of the loan were pretty attractive and I wonder if it might have been on Sanmar's books at more than face value, causing a gain to be booked when it was repaid. I will check.

[wondering]

It appears that things are going well with the CSB (Catholic Syrian Bank) IPO.  See third paragraph

 

https://economictimes.indiatimes.com/markets/ipos/fpos/bumper-ipos-bring-grey-market-alive-strong-listing-seen-for-csb/articleshow/72326645.cms

[TwoCitiesCapital]

It appears that things are going well with the CSB (Catholic Syrian Bank) IPO.  See third paragraph

 

https://economictimes.indiatimes.com/markets/ipos/fpos/bumper-ipos-bring-grey-market-alive-strong-listing-seen-for-csb/articleshow/72326645.cms

 

Fingers crossed.

[Lakesider]

https://www.moneycontrol.com/news/business/markets/csb-bank-surges-57-on-debut-day-should-investors-buy-sell-or-hold-4698961.html

[lessthaniv]

Nice bump to book value today.

 

—-

 

 

Fairfax India Holdings Corp

Symbol FIH

Shares Issued 122,631,481

Close 2019-12-13 U$ 11.97

Recent Sedar Documents

View Original Document

Fairfax India to sell 11.5% of Anchorage for $134M

 

 

2019-12-16 09:11 ET - News Release

 

Mr. John Varnell reports

 

FAIRFAX INDIA SELLS MINORITY POSITION OF ANCHORAGE INFRASTRUCTURE

 

Fairfax India Holdings Corp. has entered into an agreement to sell an interest in Anchorage Infrastructure Investments Holdings Ltd. of approximately 11.5 per cent on a fully diluted basis for gross proceeds of approximately 9.5 billion Indian rupees (approximately $134-million at current exchange rates). The interest in Anchorage will be sold by way of a private investment agreement. (Note: All dollar amounts in this news release are expressed in U.S. dollars, except as otherwise noted).

 

Anchorage is a subsidiary of Fairfax India and will be its flagship company for investing in companies, businesses and opportunities in the airport sector in India. Anchorage is also Fairfax India's platform for bidding on airport privatization projects in India. Currently, Fairfax India, through its wholly-owned subsidiary, FIH Mauritius Investments Ltd, owns a 54.0% interest in Bangalore International Airport ("BIAL"). As part of the transaction, Fairfax India will restructure its interest in BIAL such that a portion of such interest will be held through Anchorage and, following closing of the transaction, Fairfax India's effective ownership interest in BIAL will decrease to approximately 49.0% on a fully-diluted basis.

 

The transaction is subject to customary closing conditions, including various third-party consents, and is expected to close in the first half of 2020.

 

As a result of the transaction, Fairfax India will record investment gains of approximately $506 million (approximately INR 35.6 billion at current exchange rates) implying an increase in book value per share of approximately $3.30 per share. The investment gains are supported by positive operational developments at BIAL. For the 12-month period ending October 2019, total traffic at BIAL was approximately 33.7 million passengers. The second runway commenced operations in December 2019, making BIAL the first airport in India to operate independent parallel runways that enable aircraft to land or take-off simultaneously on both runways. In addition, the expansion project for a second terminal at BIAL is expected to be completed in 2021.

 

Fairfax India is an investment holding company whose objective is to achieve long-term capital appreciation, while preserving capital, by investing in public and private equity securities and debt instruments in India and Indian businesses or other businesses with customers, suppliers or business primarily conducted in, or dependent on, India.

[petec]

By my maths that implies that 43.5% of Bial has been transferred to Anchorage and 10.5% remains at FIH. That sound right?

 

My thinking is that 5% of BIAL must equal 11.5% of Anchorage.

[Lakesider]

So they sold BIAL to themselves and realised a $3 gain?  ::)

[Viking]

I am not sure who the buyer is. “The interest in Anchorage will be sold by way of a private investment agreement.”

 

My guess is the problem with private investments like BIAL is coming up with a proper valuation. If they sold a portion of BiAL to an outside investor this would perhaps give then an opportunity to update their internal valuation.

[petec]

I am not sure who the buyer is. “The interest in Anchorage will be sold by way of a private investment agreement.”

 

My guess is the problem with private investments like BIAL is coming up with a proper valuation. If they sold a portion of BiAL to an outside investor this would perhaps give then an opportunity to update their internal valuation.

 

Agreed. In an ideal world (given the stated intent to bid on other airports) the investor is an established airport operator, but if that was the case I imagine both sides would want that fact publicised.

[TwoCitiesCapital]

Crazy that this transaction has resulted in the massive pop over the last two days.

 

Same BIAL that it's always been, but the accounting change allows them to bump up the book value and start charging fees now that book value is above high water mark. If anything, shareholders are WORSE off after the transaction with regard to fees, but that didn't stop the price from ripping 10%.

[hobbit]

Crazy that this transaction has resulted in the massive pop over the last two days.

 

Same BIAL that it's always been, but the accounting change allows them to bump up the book value and start charging fees now that book value is above high water mark. If anything, shareholders are WORSE off after the transaction with regard to fees, but that didn't stop the price from ripping 10%.

 

if you compare BIAL with other publiclty traded airports around the world , it still seems quite a bit undervalued even more so with a second terminal coming up soon.

[TwoCitiesCapital]

Crazy that this transaction has resulted in the massive pop over the last two days.

 

Same BIAL that it's always been, but the accounting change allows them to bump up the book value and start charging fees now that book value is above high water mark. If anything, shareholders are WORSE off after the transaction with regard to fees, but that didn't stop the price from ripping 10%.

 

if you compare BIAL with other publiclty traded airports around the world , it still seems quite a bit undervalued even more so with a second terminal coming up soon.

 

Absolutely agree. That is, in part, why I was a buyer at $13, and $12, and $11. All I'm saying is this transaction is just an accounting entry - it's the same BIAL it was 2-days ago, but the shares are 10% higher and Fairfax can now charge fees again as this pushes NAV substantially higher.

 

I get why Fairfax did it. I just don't understand why this would pop the stock or why the people buying it today weren't aware of the value of BIAL two days ago. 

[obtuse_investor]

I find it interesting that this group assumed this transaction is an attempt by FFH to draw fees from FIH. Peak pessimism on FFH management?

 

Has anyone looked into foreign ownership rules? They did decrease beneficial ownership to 49%.

[lessthaniv]

Crazy that this transaction has resulted in the massive pop over the last two days.

 

Same BIAL that it's always been, but the accounting change allows them to bump up the book value and start charging fees now that book value is above high water mark. If anything, shareholders are WORSE off after the transaction with regard to fees, but that didn't stop the price from ripping 10%.

 

if you compare BIAL with other publiclty traded airports around the world , it still seems quite a bit undervalued even more so with a second terminal coming up soon.

 

Absolutely agree. That is, in part, why I was a buyer at $13, and $12, and $11. All I'm saying is this transaction is just an accounting entry - it's the same BIAL it was 2-days ago, but the shares are 10% higher and Fairfax can now charge fees again as this pushes NAV substantially higher.

 

I get why Fairfax did it. I just don't understand why this would pop the stock or why the people buying it today weren't aware of the value of BIAL two days ago.

 

For me, a better question is why investors sold the stock so low. At September 30, 2019 common shareholders' equity was $2,064.7 million, or book value per share of $13.53 (us). Add to that the $3.30 (us) for the current revaluation and we have book value $16.83 (us). So, if it's the same BIAL as it's always been, then the low was ~ 65% of book. With clarity on the financials coming, I think a retracement towards book value is in the cards. I'm not scratching my head as the stock recovers back up, I was scratching my head on the way down.

[obtuse_investor]

As value investors we know that Mr market has his mood swings. Head scratching moments are the precise opportunities to make money.

 

Good for you for taking advantage of the situation! :-)

[TwoCitiesCapital]

I find it interesting that this group assumed this transaction is an attempt by FFH to draw fees from FIH. Peak pessimism on FFH management?

 

Has anyone looked into foreign ownership rules? They did decrease beneficial ownership to 49%.

 

Why wouldn't we assume that?

 

They charge fees for performance and deserve to be paid them if they perform. In this case, they performed, but the accounting nature prevented that performance from being realized for fee calculations. This transaction changes that. 

 

I'm certainly not saying it's a bad thing or an immoral thing - they deserve to be paid. Only that us investors we're getting a free ride before, and we're not now and the stock is up on that news.

[wondering]

https://www.fairfaxindia.ca/news/press-releases/press-release-details/2019/Fairfax-India-Completes-Transaction-With-Sanmar-Chemicals-Group/default.aspx

[Viking]

Crazy that this transaction has resulted in the massive pop over the last two days.

 

Same BIAL that it's always been, but the accounting change allows them to bump up the book value and start charging fees now that book value is above high water mark. If anything, shareholders are WORSE off after the transaction with regard to fees, but that didn't stop the price from ripping 10%.

 

if you compare BIAL with other publiclty traded airports around the world , it still seems quite a bit undervalued even more so with a second terminal coming up soon.

 

Absolutely agree. That is, in part, why I was a buyer at $13, and $12, and $11. All I'm saying is this transaction is just an accounting entry - it's the same BIAL it was 2-days ago, but the shares are 10% higher and Fairfax can now charge fees again as this pushes NAV substantially higher.

 

I get why Fairfax did it. I just don't understand why this would pop the stock or why the people buying it today weren't aware of the value of BIAL two days ago.

 

For me, a better question is why investors sold the stock so low. At September 30, 2019 common shareholders' equity was $2,064.7 million, or book value per share of $13.53 (us). Add to that the $3.30 (us) for the current revaluation and we have book value $16.83 (us). So, if it's the same BIAL as it's always been, then the low was ~ 65% of book. With clarity on the financials coming, I think a retracement towards book value is in the cards. I'm not scratching my head as the stock recovers back up, I was scratching my head on the way down.

 

The stock is on sale again :-) trading today at under $12.50. With the second terminal at BIAL scheduled to open next year there is more near term upside for that asset to continue to grow much more in value.

 

Given the disconnect in where the stock is trading ($12.50) and likely reported Q4 book value ($16.50 to $17.00) it will be interesting to see how Fairfax India (and Fairfax) responds. I see in the past Fairfax India has bought back stock; perhaps they get more aggressive and use some of the proceeds from recent transactions to buy back a big chunk of stock. Or perhaps Fairfax increases its stake?