Fairfax India new issue

[alpha]

I have really soured on this company after building a large position over the last couple years.

It started off with a basket of traditional value investments that were easy to predict future earnings based on publicly available data and could simply be held for long the long term for modest gains.

Now it seems to becoming a deal making machine for the sake of making deals, trying to predict future earnings and valuation is becoming too complex.

[Viking]

Fairfax India, similar to Fairfax, has been a tough buy and hold stock for investors. However, trading at $12.60 today the stock, at current levels, looks cheap to me. I only have a very small position but would be happy more on weakness (I still own a bunch of Fairfax). 

The good news is the equities in Fairfax India that are publicly traded are on fire. As a result book value will be up significantly in Q1. 

The near term challenge with Fairfax India is BIAL. Not sure how fast airport travel will pick up in 2021 but it makes sense to me it will take 12-18 months to get back to the new normal. If investors remain luke warm on airport assets this could hold down the stock price of Fairfax India.

I am very much in favour of the two announced IPO’s (Seven Islands and Sanmar). It appears financial markets are keen for IPO’s and the businesses need $ for growth and to manage their balance sheets. With 2 more companies publicly traded this will make it more transparent to value Fairfax India. It also looks like Fairfax/Fairfax India is sending the message to their equity holdings that they need to swim on their own moving forward (with less support from the mother companies) - at least i hope this is the case  

And Anchorage, when it finally happens, will be interesting to learn more about. It adds complexity. And it is very ambitious. Infrastructure is a hot sector right now. Fairfax/Fairfax India has a pretty good long term track record investing in India so i am going to give them the benefit of the doubt for now. 

Another layer is how one views emerging market in the coming years. My guess is India could perform well and i like getting exposure through Fairfax and Fairfax India (where the 2 stocks are priced today). Both look to be trading at a nice discount  

Edited April 6, 2021 by Viking

[Viking]

Attached below is a spreadsheet that captures the value of Fairfax India's publicly traded equity holdings at March 31. They were up US $331 million (35%) in Q1 to $1,267 million = an increase of $2.21/share. Not too shabby.  BV at Dec 31 was $16.37.

When Fairfax India reports Q1 earnings we should see a nice increase in BV to perhaps around $18/share, a new record high. Shares look cheap to me currently trading at $12.45. I was adding to my position late last week.

Fairfax India is also in the process of IPO'ing three holdings: Seven Islands, Sanmar and Anchorage (BIAL). Once completed (likely later this year) more than 90% of Fairfax India's holdings will be publicly traded stocks and this will make it pretty simple for investors to value FIH.

If the shares stay this cheap one has to wonder why FIH does not get more aggressive with share buybacks. Especially once the Anchorage transaction is approved and they receive proceeds of $130 million.

Looking further out, if FIH shares stay cheap into 2022 (permanent large discount), I wonder if Fairfax decides to move to 100% ownership. Similar to what Brookfield is doing with Brookfield Property. Perhaps the first step in this happening will be in FIH gets aggressive with share buybacks (which will increase FFH ownership); this is what we saw at Brookfield Property.

__________________________

So Fairfax India launched in 2016 at a price of $10; they raised more capital in late 2016 at $11.75/share. Shares are trading in April 2021 at $12.45.

Since IPO in 2016, looking at the publicly traded stocks, Fairfax India is up almost 100% (Cost = $657 million; March 31 value = $1,267). Bottom line, Fairfax India has performed very well with its publicly traded stock investments. These companies represent 38% of the fair value of Fairfax India's total equity holdings.

Looking at the private equity holdings the only poor performer has been NCML (down about $90 million). All the other private holdings are worth more today than they were purchased for. (Cost = $1,205; Dec 31 fair value estimate = $2,070 million). BIAL, at 42% of FIH, is the big fish here.   

So when i look at the full body of work (publicly traded and private investments) it looks to me like Fairfax India has done a pretty good job since 2016. Fairfax India has also done a fair bit of work positioning the holdings to be successful: splitting IIFL into 4 companies; management of BIAL; new management at CSB bank; re-org of Privi and Fairchem Organics. IPO of Seven Islands and Sanmar two more steps in the right direction. Bottom line, most of the companies Fairfax India owns look to be well managed and they look positioned to be successful moving forward. 

Fairfax Equity Holdings Mar 31 2021.xlsx

Edited April 12, 2021 by Viking

[valueinvesting101]

Fairfax India Announces Sale of its Equity Interest in Privi Speciality Chemicals Limited

https://www.fairfaxindia.ca/news/press-releases/press-release-details/2021/Fairfax-India-Announces-Sale-of-its-Equity-Interest-in-Privi-Speciality-Chemicals-Limited/default.aspx

Seem to be selling at 31% discount to the current market price. 17% above carrying value on 31 December 2020.

[TwoCitiesCapital]

1 hour ago, valueinvesting101 said:

Fairfax India Announces Sale of its Equity Interest in Privi Speciality Chemicals Limited

https://www.fairfaxindia.ca/news/press-releases/press-release-details/2021/Fairfax-India-Announces-Sale-of-its-Equity-Interest-in-Privi-Speciality-Chemicals-Limited/default.aspx

Seem to be selling at 31% discount to the current market price. 17% above carrying value on 31 December 2020.

Very interesting that the buyer got a control 'discount' instead of a paying the typical control 'premium'

31% off fair market value just seems steep without explaining the why behind it? 

[hobbit]

 

3 hours ago, TwoCitiesCapital said:

Very interesting that the buyer got a control 'discount' instead of a paying the typical control 'premium'

31% off fair market value just seems steep without explaining the why behind it? 

Doing this deal without any explanation tells you everything you need to know about the quality of people at Fairfax and what they think of minority shareholders.

 

Is there any example of a large stake sale happening at such a steep discount ...ever? Typically the worst ones are at 5-10% premium over the share price.  This is a terrible look on the mgmt in a market which is already skeptical and gives them a 30-50% discount to BV. Maybe rightfully so. 

Edited April 22, 2021 by hobbit

[valueinvesting101]

Deal seems to be at price ~640/share (INR) whereas current price is 920/share. Privi's price has increased a lot since mid March 2021 from around 640 range.

Annual report had disclosed

Quote

Subsequent to the anticipated closing of the Fairchem Open Offer, the company intends to decrease its equity interest in Privi Speciality to 38.9% from its current 48.8% and increase its equity interest in Fairchem Organics to 66.7% from its current 48.8% through a series of transactions with Privi’s founders in the first quarter of 2021, subject to applicable regulatory approvals and customary closing conditions.

But above details were not mentioned in the annual letter to shareholders. 

Edited April 23, 2021 by valueinvesting101

[Viking]

Privi Specialty had a cost of US$40 million and it sold for $163 which is a 4 bagger in Peter Lynch lingo. Not too shabby. On Dec 31 it was trading at 549. In March the stock was trading at 640 (exactly where it sold one month later).

It is also a very thinly traded stock (74% of shares outstanding were owned by Fairfax India and ‘Mahesh’).

I do not have any strong views on the discount paid to the current market price given the size of the position sold (48.8%), how much the stock had run up recently and how thinly traded it is. 

Edited April 23, 2021 by Viking

[ICUMD]

Good points Viking.  People often make the mistake of judging a company by the share price, myself included. 

4x return on Privi is excellent.  What will be more interesting is what they use the funds for.

While Fairfax India's price has lagged, I don't see management clearly dropping the ball on any of their decisions.

 

[valueinvesting101]

As per annual report purchase price for Privi was $55 million in Aug 2016. There was merger and demerger, so this price might be reflecting cost after considering those transactions. Still 3x return in less than 5 years. 

Incoming cash might be going to Bangalore Airport as Indian Govt. is looking to reduce the stake and Fairfax has right of first refusal. 

https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/government-to-sell-remaining-stake-in-delhi-mumbai-bangalore-hyderabad-airports/articleshow/81492214.cms

Edited April 24, 2021 by valueinvesting101

[Daphne]

What does board wisdom think about this idea?  Given the pending iPOs and a current book value of $ 18 US (well above recent trading range) how profitable and long sighted might it be if FFH with OMERS were to take Fairfax India private?

[StubbleJumper]

33 minutes ago, Daphne said:

What does board wisdom think about this idea?  Given the pending iPOs and a current book value of $ 18 US (well above recent trading range) how profitable and long sighted might it be if FFH with OMERS were to take Fairfax India private?

 

It would likely be quite profitable, even if FFH entered into the typical deal with OMERS where OMERS seems to be basically guaranteed 9% for a few years. 

The question is whether it would be yet one more transaction that would be abusive of minority shareholders.  If FFH offered, say US$14 or $15, it would once again call into question the company's integrity.  A buyout at 0.8x BV would be yet one more transaction where FFH might appear to take advantage of its minority partners.  Do you do something like that to potentially add ~US$350m of value to the holdco?  History would say, yes....

 

SJ

[Viking]

If Fairfax had a strategic reason for taking Fairfax India private then i think they could worry less about the optics of purchase below BV.

The immediate problem for Fairfax is where do they find the cash? They are selling 14% of Brit because they need cash to delever. And if they have some extra cash why not buy back FFH stock trading at 0.9XBV. 

[petec]

The other point is they’ve repeatedly said they intend to raise more capital in the vehicle. I think the long term plan here is a huge fee stream, not a short term bump to book value. 

[TwoCitiesCapital]

21 hours ago, StubbleJumper said:

 

It would likely be quite profitable, even if FFH entered into the typical deal with OMERS where OMERS seems to be basically guaranteed 9% for a few years. 

The question is whether it would be yet one more transaction that would be abusive of minority shareholders.  If FFH offered, say US$14 or $15, it would once again call into question the company's integrity.  A buyout at 0.8x BV would be yet one more transaction where FFH might appear to take advantage of its minority partners.  Do you do something like that to potentially add ~US$350m of value to the holdco?  History would say, yes....

 

SJ

Agreed. It would be poor optics and a signal, once again, not to invest alongside FFH but rather in FFH if you want to participate. Ideally, Fairfax India could arrange some similar repurchase agreement w/ a total return swap or borrowed funds to repurchase ~10-15% of the shares at these prices. Particularly since they've announced the sale of one of the funds holdings and will have cash on hand. 

 

15 hours ago, petec said:

The other point is they’ve repeatedly said they intend to raise more capital in the vehicle. I think the long term plan here is a huge fee stream, not a short term bump to book value. 

I think this is the better play for them long-term - and for them to grow that economic pie they should announce a share repurchase to 1) demonstrate a commitment to ensuring value realization for the holders of Fairfax India stock 2) improve historical return optics to more closely align with the book value appreciation and 3) to get them back to the place where they have optionality of issuing new shares if interest in the vehicle/market grows. 

[ICUMD]

Certainly hope there is no buyout of Fairfax India at these depressed prices.  Brookfield has recently done the same on their Brookfield properties, offering only about 2/3 of book value. 

I would much prefer to see Fairfax continue to build their revenue stream and continue to mark to market their assets.

I believe this whole Covid fiasco is responsible for the discount to BV that we are currently seeing.

 

[hobbit]

I am surprised how optimistic this board is regarding mgmt given that they have very little skin in the game and their history of screwing over minority share holders . Privi being the most recent example.

[Viking]

2 hours ago, ICUMD said:

Certainly hope there is no buyout of Fairfax India at these depressed prices.  Brookfield has recently done the same on their Brookfield properties, offering only about 2/3 of book value. 

I would much prefer to see Fairfax continue to build their revenue stream and continue to mark to market their assets.

I believe this whole Covid fiasco is responsible for the discount to BV that we are currently seeing.

 

The Covid situation in India is looking like Italy back in March of 2020 (a tragedy). I have sold my Fairfax India and purchased more Fairfax. 

For Fairfax, the Covid situation in India (and its impact on the economy in the short term) is the one negative i see right now. 

[Thrifty3000]

On 5/1/2021 at 10:59 PM, Viking said:

The Covid situation in India is looking like Italy back in March of 2020 (a tragedy). I have sold my Fairfax India and purchased more Fairfax. 

For Fairfax, the Covid situation in India (and its impact on the economy in the short term) is the one negative i see right now. 

I have a hunch India's current covid wave will play out like prior waves have played out in other countries - like Italy and the US. Now that hospitals are at max capacity and global media has all eyes on India, governments will lock down, people will mask up/distance, and case loads will peak in a couple weeks. It will then take several weeks for cases to decline to the pre-wave level.

[obtuse_investor]

Interesting development!

 

Fairfax India Announces US$105 Million Substantial Issuer Bid

Quote

 

...

The Offer will proceed by way of a “modified Dutch auction”, which allows shareholders to select the price, within the specified range, at which each shareholder is willing to sell all or a portion of their Shares. The Offer prices range from US$12.50 to US$15.00 per Share (in increments of US$0.10 per Share). The Offer will be for up to a maximum of 8,400,000 Shares, or approximately 7.0% of Fairfax India’s 119,323,756 total issued and outstanding Shares, based on full participation and a purchase price equal to the minimum purchase price per Share.

...

 

 

https://www.fairfaxindia.ca/news/press-releases/press-release-details/2021/Fairfax-India-Announces-US105-Million-Substantial-Issuer-Bid/default.aspx 

 

Curious timing. FIH stock was down 5.3% today. This press release came out after market close today.

Edited June 16, 2021 by obtuse_investor
Making link clickable

[Viking]

With Fairfax India trading at US$12.30 and BV around $18 this move does not surprise me. Especially with Fairfax India languishing in the $12 range for the past 4 months. It makes sense Fairfax India would want to take advantage of the situation.
 

Fairfax India has 149.6 million shares outstanding. I think Fairfax controls 1/3 of shares so this leaves a max of 100 million available for the tender. At the midpoint of the offer ($13.75) Fairfax India would retire 7.6 million shares. Fairfax India trades about 80,000 shares per day (on TSE and US) so it would be pretty difficult for Fairfax India to buy 7.6 million shares on the open market in a reasonable amount of time (and not also spike the price significantly to well over $15). 

it will be interesting to see how Fairfax India shares perform in the next week

 

PS: i think Fairfax also believes its share price is severely undervalued... it would not surprise me to see them do something as well in the coming months. 

Edited June 16, 2021 by Viking

[Pedro]

Is anyone here going to tender?

 

I'm debating it.  I understand the bull case going forward but part of me wants to just move on from holding this for so long with pretty dismal return compared to what an index fund could have done in the meantime.  

 

I'm on the ledge. Should I step back or be pushed off?

[thepupil]

On 3/30/2015 at 9:32 AM, thepupil said:

 

yep, in order to value something that is going to grow at a rate that is above your required return, you have to somehow deal with the fact that, in theory, if you assume something will grow forever at an above RoR rate you would pay an infinite price (like something with above market earnings growth). An imperfect way of dealing with this is to say "I will make above market returns for 5, 10, 20...etc. years and then this thing will make market returns or be liquidated and worth NAV. 20 yrs is a long time. Over the past 20 yrs we've seen plenty of capital allocator/guru stocks fall from grace to prices at or below NAV. I think to assume a permanent premium to NAV on a fee laden vehicle is pretty optimistic, but faith/optimism is your style so that's fine. I would just note that you probably could've made an argument for great returns and big premiums to book/NAV on any of these when they traded at big premiums 10 -20 yrs ago.

 

Loews (founders died, a shadow of what it once was, 80% of NAV)

Berkshire (has re-rated from as high as 3X book to more reasonable multiple as it has matured, if you marked wholly owned subs to market, it would probably be at about 1X NAV)

Leucadia (2X book to 80% over past 10 or so yrs)

 

I don't think you'll hurt yourself at today's modest premium to NAV, but if I saw a manager double AUM with one capital raise right after a year of Modi-induced euphoria (India Small Cap was up like 90% last year, right?), I'd be wary, rather than get excited and say that 2X NAV may be the right price. I'm skeptical of everyone out there that is monetizing their track record; there seem to be more public GP's/asset managers and permanent capital vehicles every week.

 

As for IKYA, I don't really see how 1 company's spectacular growth in earnings justifies anything or makes an argument either way. High quality fast growing businesses in India trade for lofty multiples in my limited experience (check out the subs of multi-nationals like Unilever and Nestle or some smaller cap niche businesses); it's not like the sellers over there are idiots and are going to give away companies for free. Now lots of those same high multiple companies have historically made great returns despite their valuations because they've grown at very fast rates, but that doesn't mean you'd want to pay a large NAV premium on top of fees for them at a time when every institutional investor in the world and every Indian out there is super bulled up and excited about India.

 

But it's tough to argue about an investment that is 100% cash because there aren't many thingss to analyze here (except for HWIC India excellent track record on much smaller $).

 

I could probably use a little more of your faith and optimism, but I'll venture to say you could probably use a touch more skepticism

 

 

http://in.reuters.com/article/2015/02/06/hedgefunds-india-performance-idINKBN0LA1UY20150206

http://www.wsj.com/articles/india-hedge-funds-best-global-performers-this-year-1415789542

http://www.cnbc.com/id/102220187

 

From 3/30/2015

 

FIH total return:                      7% in USD   (1.1% / yr)

MSCI India                              62% in USD (8.1% / yr)

MSCI India Small Cap             85% in USD (10.4% / yr)

 

Price to book: 1.2x ---> 0.7x, w/ peak of 1.4x and trough of 0.4x in covid depths

 

Almost any publicly traded investment company is destined to eventually trade at a big discount and go from loved to hated to maybe loved again. 

 

I need to play a little catch up and missed buying this at the juicy lows, but probably not a terrible time to have a look at this given the long term underperformance and sentiment correction (from premium to discount). 

 

BVPS has gone from $9.5 to $18 since 6/2014, so it's not like it's destined to destroy value. But price has really mattered. If you paid a big premium, your return probably sucked. If you got a big enough discount/bought into bad macro, you probably are sitting on a decent IRR. 

[hobbit]

Unless something goes horribly wrong with COVID in India in terms of a third wave which lasts for a few months. This is a 25+ stock in 1-2 years.

[TwoCitiesCapital]

5 hours ago, Pedro said:

Is anyone here going to tender?

 

I'm debating it.  I understand the bull case going forward but part of me wants to just move on from holding this for so long with pretty dismal return compared to what an index fund could have done in the meantime.  

 

I'm on the ledge. Should I step back or be pushed off?

 

I'm considering buying more shares at $13 to try to tender for $15. Wouldn't be mad if I get stuck with them though.