Fairfax India new issue

[StubbleJumper]

54 minutes ago, Viking said:

I wonder if Fairfax cares about the very low price of Fairfax India.

 

I always recommend that people reflect on Prem's personal interests.  So, in this case, Prem owns a considerable slug of FFH but I don't believe that he personally owns a meaningful position in Fairfax India (but please correct me if my understanding is poor).  Prem gets a benefit from the increase in Fairfax India's BV because that ultimately flows to FFH.  Through his shares in FFH, Prem also gets a benefit from the annual investment fees and the tri-annual performance fee triggered by growing Fairfax India's BV by more than 5%.  When there is a large performance fee, it can be settled by issuing Fairfax India shares to FFH at the prevailing market price.

 

So, from where I sit, Prem (and all of the rest of us FFH-only shareholders) benefits when Fairfax India's accounting BV grows quickly triggering a performance fee and that benefit is even more pronounced when Fairfax India trades at a discount to book. 

 

The discount to book matters to Prem because it provides an opportunity for a discounted share buyback which pushes book up and helps trigger the performance fee, and once every three years a discount to book would be the lollapalooza factor when FFH actually receives shares for its performance.

 

Prem's a pretty smart dude.  I recommend that people always follow the money.

 

 

SJ

 

 

Edited September 30, 2021 by StubbleJumper

[ICUMD]

13 minutes ago, StubbleJumper said:

 

I always recommend that people reflect on Prem's personal interests.  So, in this case, Prem owns a considerable slug of FFH but I don't believe that he personally owns a meaningful position in Fairfax India (but please correct me if my understanding is poor).  Prem gets a benefit from the increase in Fairfax India's BV because that ultimately flows to FFH.  Through his shares in FFH, Prem also gets a benefit from the annual investment fees and the tri-annual performance fee triggered by growing Fairfax India's BV by more than 5%.  When there is a large performance fee, it can be settled by issuing Fairfax India shares to FFH at the prevailing market price.

 

So, from where I sit, Prem (and all of the rest of us FFH-only shareholders) benefits when Fairfax India's accounting BV grows quickly triggering a performance fee and that benefit is even more pronounced when Fairfax India trades at a discount to book. 

 

The discount to book matters to Prem because it provides an opportunity for a discounted share buyback which pushes book up and helps trigger the performance fee, and once every three years a discount to book would be the lollapalooza factor when FFH actually receives shares for its performance.

 

Prem's a pretty smart dude.  I recommend that people always follow the money.

 

 

SJ

 

 

SJ, I don't disagree with any of this.  FFH definitely wins basing performance fees on book value rather than market value.

 

That begs the question, what is the true value of Fairfax India?  $13 or 20?

 

One of these is mis-priced.  

And why would Omers (a savy investor) buy Fairfax India rather than FFH ?

 

 

 

 

[StubbleJumper]

15 minutes ago, ICUMD said:

SJ, I don't disagree with any of this.  FFH definitely wins basing performance fees on book value rather than market value.

 

That begs the question, what is the true value of Fairfax India?  $13 or 20?

 

One of these is mis-priced.  

And why would Omers (a savy investor) buy Fairfax India rather than FFH ?

 

 

 

 

 

Who knows what the assets are truly worth.  Probably around $20, but there is much uncertainty about what they could actually sell for.  In the meantime, FFH's performance fee of 20% of any growth over the hurdle becomes more like 30% of any growth over the hurdle if they are paid in shares that are trading at two-thirds of book.  So, we FFH shareholders should pray that this discount will prevail until December 2023.

 

I'm not sure that OMERS would buy shares in either FFH or Fairfax India.  It seems to me that the deals involving OMERS and FFH usually take the form of investments in specific assets for which FFH has a buy-out option at a price that always seems to return 9% for OMERS.  A cynical fellow would describe that as borrowing money from OMERS at 9%...

 

SJ

[ICUMD]

26 minutes ago, StubbleJumper said:

 

Who knows what the assets are truly worth.  Probably around $20, but there is much uncertainty about what they could actually sell for.  In the meantime, FFH's performance fee of 20% of any growth over the hurdle becomes more like 30% of any growth over the hurdle if they are paid in shares that are trading at two-thirds of book.  So, we FFH shareholders should pray that this discount will prevail until December 2023.

 

I'm not sure that OMERS would buy shares in either FFH or Fairfax India.  It seems to me that the deals involving OMERS and FFH usually take the form of investments in specific assets for which FFH has a buy-out option at a price that always seems to return 9% for OMERS.  A cynical fellow would describe that as borrowing money from OMERS at 9%...

 

SJ

Your first point is well taken.  

 

I suppose FFH is hedging their bets on the discount until dec 2023 by buying up shares in the open market.  Also via the Dutch auction. 

 

Re Omers, they have already purchased an 11.5% interest in Anchorage.  Granted, I don't know the behind the scenes deal other than some 'ratchet clause'.  Surely they will also be subject to the same fees?

 

In any case, for us Fairfax India shareholders, hopefully the discount to book value is closed in the near future.  

 

 

[glider3834]

7 hours ago, TwoCitiesCapital said:

 

Not an accounting professional, but I think this is right. 

 

My understanding is you have to consolidate anything where you have substantial control. Hard to argue that isn't the case here regardless of their % ownership. 

Yes correct consolidate because they have 93% voting control even though they have less than 50% ownership

[Viking]

I think part of the plan to get Fairfax India trading close to BV is to get more of the private holdings trading on public exchanges via IPO’s. 
- Chemplast Sanmar done

- Seven Islands in process (still i think)

- Anchorage in 2022 (timing correct?)

 

If these companies all become publicly traded then most of Fairfax India’s holdings will be publicly traded and it will be very easy to understand and calculate book value. 
————————

Fairfax India has a big decision to make with where to invest its free cash flow. The stock is so cheap buying back the stock is an easy decision. However, the management team has a very good track record with their equity investments. Not surprisingly we are seeing them do both. My guess is they would much prefer to grow the company (not shrink it).

[glider3834]

1 hour ago, Viking said:

I think part of the plan to get Fairfax India trading close to BV is to get more of the private holdings trading on public exchanges via IPO’s. 

agreed Viking

[glider3834]

7 hours ago, ICUMD said:

If there is any doubt to the market value of BIAL now, one only had to look at what was paid for other airports under the Private partnership plan.

Has anyone found the multiples on these? How do they compare to BIAL?

[petec]

2 hours ago, glider3834 said:

agreed Viking

The funny thing is, when everything is listed the portfolio becomes easy to replicate. Listings won’t necessarily solve the discount problem, although they do make calculating the NAV easier. Many holding companies trade at persistent and sizeable discounts to book even when most of the NAV is listed and management have a good track record. 

 

BTW, referring to the debate above, the other reason Prem will care about the FIH stock price is that they originally intended to raise “billions” more in this vehicle - which would be great for fees but which they can’t really do unless it trades near book. 

[glider3834]

19 minutes ago, petec said:

The funny thing is, when everything is listed the portfolio becomes easy to replicate. Listings won’t necessarily solve the discount problem, although they do make calculating the NAV easier. Many holding companies trade at persistent and sizeable discounts to book even when most of the NAV is listed and management have a good track record. 

 

BTW, referring to the debate above, the other reason Prem will care about the FIH stock price is that they originally intended to raise “billions” more in this vehicle - which would be great for fees but which they can’t really do unless it trades near book. 

 

True - could this be one factor behind the discount?

Dividends The company did not pay any dividends on its outstanding multiple and subordinate voting shares during 2020 and 2019.

 

But if investors own the underlying shares of listed stocks that Fairfax India owns, they would receive dividends & avoid management fees. So maybe thats a disincentive to own via Fairfax India.

 

Paying dividends would also mean cash flow for Fairfax Financial. They could change the performance fee  calc to total shareholder return in terms of BVPS growth plus dividends - just a thought??

 

 

 

 

 

[glider3834]

5 minutes ago, glider3834 said:

 

True - could this be one factor behind the discount?

Dividends The company did not pay any dividends on its outstanding multiple and subordinate voting shares during 2020 and 2019.

 

But if investors own the underlying shares of listed stocks that Fairfax India owns, they would receive dividends & avoid management fees. So maybe thats a disincentive to own via Fairfax India.

 

Paying dividends would also mean cash flow for Fairfax Financial. They could change the performance fee  calc to total shareholder return in terms of BVPS growth plus dividends - just a thought??

 

 

 

 

 

actually thinking about it FFH are not taking their performance fee in cash but in shares - it sounds like they are not interested in a cash dividend  but I guess they could also do dividend reinvestment - anyway going a a hypothetical rant...

Edited September 30, 2021 by glider3834

[petec]

44 minutes ago, glider3834 said:

 

True - could this be one factor behind the discount?

Dividends The company did not pay any dividends on its outstanding multiple and subordinate voting shares during 2020 and 2019.

 

But if investors own the underlying shares of listed stocks that Fairfax India owns, they would receive dividends & avoid management fees. So maybe thats a disincentive to own via Fairfax India.

 

Paying dividends would also mean cash flow for Fairfax Financial. They could change the performance fee  calc to total shareholder return in terms of BVPS growth plus dividends - just a thought??

 

 

 

 

 

 

I think the performance fee is well designed. I also know of several holding companies that have traded at persistent discounts even while paying a dividend. In fact often the best reason to hold the holdco rather than the underlying is the yield pickup. 

 

The other thing I have seen in several holdcos is that persistent discounts become self-justifying - stock X trades at a discount of Y because it always has.

 

I don't hold FIH but if I did I think I would assume a 25% discount in the long run. That might be conservative, but it would not be the first holding company to do so.  

[Xerxes]

14 hours ago, StubbleJumper said:

 

I always recommend that people reflect on Prem's personal interests.  So, in this case, Prem owns a considerable slug of FFH but I don't believe that he personally owns a meaningful position in Fairfax India (but please correct me if my understanding is poor).  Prem gets a benefit from the increase in Fairfax India's BV because that ultimately flows to FFH.  Through his shares in FFH, Prem also gets a benefit from the annual investment fees and the tri-annual performance fee triggered by growing Fairfax India's BV by more than 5%.  When there is a large performance fee, it can be settled by issuing Fairfax India shares to FFH at the prevailing market price.

 

So, from where I sit, Prem (and all of the rest of us FFH-only shareholders) benefits when Fairfax India's accounting BV grows quickly triggering a performance fee and that benefit is even more pronounced when Fairfax India trades at a discount to book. 

 

The discount to book matters to Prem because it provides an opportunity for a discounted share buyback which pushes book up and helps trigger the performance fee, and once every three years a discount to book would be the lollapalooza factor when FFH actually receives shares for its performance.

 

Prem's a pretty smart dude.  I recommend that people always follow the money.

 

 

 

Prem has been more wrong then right in the past 10 years, perhaps, he would be wrong here as well (if he truly wishes to have a large discount) and the FIH discount does not persist, to the benefit of FIH direct holder and to the detriment of FFH's performance fee.

 

but joking aside, is it logical to think only through the KPI of FFH% ownership ?

 

Isn't there a part of this scheme, where Prem is thinking "i want FIH to be must own asset when investor want exposure to India like BEP is a must own asset in the renewable word, and therefore i want to have the broadest set of investor and not keep increasing FFH% own stake"

 

Also earlier above it was pointed how FIH is carried on the FFH's book for $10 with market being at $13 and FIH BV being at $20. 

 

Is it more advantageous for FFH and Prem to:

 

     (1)   have a large discount, to have an incentive to have FIH buybacks such that BV moves up, and FFH gets more % ownership as a result

or

     (2)  perhaps monetize a bit of its FIH holding to a third-party, and get a new "mark" closer to BV of $15-20, thereby lifting its carry from $10 to a higher number, thereby helping pushing FFH's BV close to intrinsic value. Why would a third party want to buy a piece of FIH from Prem when they can buy it cheaper on the market. Liquidity perhaps ... 

 

 

 

 

 

 

 

Edited September 30, 2021 by Xerxes

[StubbleJumper]

9 minutes ago, Xerxes said:

     (2)  perhaps monetize a bit of its FIH holding to a third-party, and get a new "mark" closer to BV of $15-20, thereby lifting its carry from $10 to a higher number, thereby helping pushing FFH's BV close to intrinsic value. Why would a third party want to buy a piece of FIH from Prem when they can buy it cheaper on the market. Liquidity perhaps ... 

 

You've delved right down to the bottom line, I'd say.  The prevailing market price really only matters if you intend to sell (a portion) your holding or if you need to use it as collateral.  But, if you don't intend to sell or borrow against it any time soon, why do you care if the market price lags (this applies to both Fairfax India and FFH shares)?  Pete has provided the best potential explanation for that, which is that a capital raise might be desirable at some point, but short of that, if the shares trade at a discount for a decade, why would a long-term holder (like FFH) care?

 

 

SJ

[ICUMD]

54 minutes ago, StubbleJumper said:

 

You've delved right down to the bottom line, I'd say.  The prevailing market price really only matters if you intend to sell (a portion) your holding or if you need to use it as collateral.  But, if you don't intend to sell or borrow against it any time soon, why do you care if the market price lags (this applies to both Fairfax India and FFH shares)?  Pete has provided the best potential explanation for that, which is that a capital raise might be desirable at some point, but short of that, if the shares trade at a discount for a decade, why would a long-term holder (like FFH) care?

 

 

SJ

The other side of the coin is the relatively small float and low daily trading volumes.

 

Continual and significant buybacks by FFH should eventually exhaust the 'weak hands' and cause a rise in market value I would think.  And FFH had been aggressive with buybacks IMO.

 

Having said that, i am surprised the Dutch auction at $14.90 didn't flush out more low priced shares and increase current market value closer to that price.

 

As far as BIAL, based on the Omers investment, it's total valuation is 2.9 billion USD.  An Anchorage IPO will help better value this on the open market.

 

 

 

 

 

[TwoCitiesCapital]

26 minutes ago, ICUMD said:

The other side of the coin is the relatively small float and low daily trading volumes.

 

Continual and significant buybacks by FFH should eventually exhaust the 'weak hands' and cause a rise in market value I would think.  And FFH had been aggressive with buybacks IMO.

 

Having said that, i am surprised the Dutch auction at $14.90 didn't flush out more low priced shares and increase current market value closer to that price.

 

As far as BIAL, based on the Omers investment, it's total valuation is 2.9 billion USD.  An Anchorage IPO will help better value this on the open market.

 

 

 

 

 

 

I was surprised too. Doesn't even seem like people tried to arbitrage it by buying shares and flipping into the tender. 

 

Figured everyone would be in on the arbitrage and it would likely fill in the lower half of the range. Was pleasantly surprised to see the fill at $14.90. Was even more surprised that I could buy those shares back in the low-to-mid 13s afterwards. 

 

As far as the discount and what Fairfax can do: I disagree having listing public or paying a dividend will get rid of the discount. The only thing supporting any argument for a premium is their access to off-market, non-public deals and their historical ability to do well with those. 

 

On the opposite end of the equation is the fees. Those two forces will battle each other pending market sentiment. 

 

Funny thing is, when this thing launched everyone gave them the benefit of the doubt. It traded at a sizable premium and I wouldn't touch it with a 10 ft pole. Now that they've actually demonstrated their ability to do this, and we no longer have to assume their success, it trades at a 30% discount - even amidst a tended offer!!!!!

 

Thank you Mr. Market!!!!!

 

[Xerxes]

2 hours ago, StubbleJumper said:

 

You've delved right down to the bottom line, I'd say.  The prevailing market price really only matters if you intend to sell (a portion) your holding or if you need to use it as collateral.  But, if you don't intend to sell or borrow against it any time soon, why do you care if the market price lags (this applies to both Fairfax India and FFH shares)?  Pete has provided the best potential explanation for that, which is that a capital raise might be desirable at some point, but short of that, if the shares trade at a discount for a decade, why would a long-term holder (like FFH) care?

 

 

SJ

 

Reputational risk.

 

Going back to my comment that there must be a part of this scheme, where Prem is thinking "i want FIH to be must-own asset when investors want exposure to India like BEP is a must own asset in the renewable world, and therefore i want to have the broadest set of investor and not keep increasing FFH% own stake" 

 

This means lower %FFH ownership of FIH overtime (not more) and more broad institutional investment, but then again as pointed by others direct listing of the subs (and competing platform i.e. Brookfield) would take that uniqueness away from FIH for large institutional investors.

 

 

 

[Viking]

Great discussion. Yes, for investors buying shares today in the low $13 range there appears to be lots of upside. With Q2 BV (using post buyback share count) at $20 shares are trading today at a 35% discount; hard to see this getting much larger (although nothing would surprise me). My preference is to own the shares of Fairfax India through Fairfax. However, i do have a trading position in Fairfax India and i have been in and out of the stock a couple of times so far this year. I bought again this week at $13.30. 
 

Building on one of Petec’s earlier comments, i think Fairfax wants to grow the size of Fairfax India. I think Prem wants to invest more heavily in India and Fairfax India is the vehicle. But how do you raise significantly more capital to accelerate your growth with the shares trading at $13?

 

As ICUMD mentioned, liquidity is a big issue. I experience the challenge buying and selling the stock (lack of liquidity). So the stock is likely off limits for most large funds. So they really do need to materially increase the float if they expect to attract the big money. The question is how do you do that with the stock trading at $13? And buybacks only make this problem worse.
 

The management team at Fairfax India must also be going a little stir crazy. They made a number of purchases 5 and 6 years ago. They then spent a few years getting the holdings positioned to succeed. Most of the companies they own are very well positioned, with strong management teams. They are executing well and business results are very good. And their stock prices of the various publicly traded holdings are up significantly in 2021. 
 

My guess is the management team at Fairfax India is ready for more. Perhaps this is where an Anchorage IPO comes in to play. Perhaps Anchorage also becomes the vehicle to attract a significant amount of new capital. 
 

Perhaps the plan with Fairfax India is to simply let it chug along. Continue to buy back stock at a significant discount to BV. Fairfax will see its ownership of Fairfax India continue to increase fairly significantly every year. Chug chug chug…

[Viking]

Regarding the recent Chemplast Sanmar IPO can someone help me out with what the total share count is and what Fairfax India’s % ownership is? 
 

i have tried to figure it out and i must be a little brain dead because i am striking out. I want to add it to my spreadsheet that tracks all the different Fairfax India holdings  

[StubbleJumper]

4 hours ago, ICUMD said:

The other side of the coin is the relatively small float and low daily trading volumes.

 

Continual and significant buybacks by FFH should eventually exhaust the 'weak hands' and cause a rise in market value I would think.  And FFH had been aggressive with buybacks IMO.

 

I would say that E-L Financial, Economic Investment Trust and United Corp are the poster-children for companies that chronically trade at a discount to book.  The Jackman family appears to have been engaged in the slowest process of taking ELF private that I have ever seen.  The "weak hands" have not disappeared over the many years.  But, does the Jackman family care?  They don't appear to have any intention to sell their position, so they just slowly consolidate their position using the discount provided by the market.  Maybe some family members are losing sleep over it, but if so, it's not obvious to an outside observer.

 

 

2 hours ago, Xerxes said:

Reputational risk.

 

Maybe Prem is worried about his reputation, but if that's the case, he certainly picks his spots where he worries but ignores a great many other opportunities to protect or bolster his reputation. 

 

 

SJ

[glider3834]

6 hours ago, Viking said:

My guess is the management team at Fairfax India is ready for more. Perhaps this is where an Anchorage IPO comes in to play. Perhaps Anchorage also becomes the vehicle to attract a significant amount of new capital. 

Do we know if Fairfax India or FFH will charge Anchorage a separate performance/investment management fee %? 

Edited September 30, 2021 by glider3834

[StubbleJumper]

22 minutes ago, glider3834 said:

Do we know if Fairfax India or FFH will charge Anchorage a separate performance/investment management fee %? 

 

 

If they do charge a mgt fee to Anchorage, it would cascade with the existing mgt fee that Fairfax India currently pays (ie, if Anchorage bought an asset it would trigger a fee, and then that new asset gets consolidated into Fairfax India, which triggers a second fee).

 

SJ

[glider3834]

11 hours ago, Xerxes said:

Is it more advantageous for FFH and Prem to:

 

     (1)   have a large discount, to have an incentive to have FIH buybacks such that BV moves up, and FFH gets more % ownership as a result

or

     (2)  perhaps monetize a bit of its FIH holding to a third-party, and get a new "mark" closer to BV of $15-20, thereby lifting its carry from $10 to a higher number, thereby helping pushing FFH's BV close to intrinsic value. Why would a third party want to buy a piece of FIH from Prem when they can buy it cheaper on the market. Liquidity perhaps ... 

this is a good point Xerxes 

 

I would think longer term FFH have an incentive to own as much of Fairfax India as they can, at the widest possible discount to book value. 

 

They can do this through FIH buybacks or by taking their performance fee in 'cheap' shares.

 

If that discount then narrows over time, FFH stands to gain. 

 

I think the IPO of Anchorage as well as providing NAV visibility also has the benefit they can potentially raise capital at or around Anchorage's NAV which they can't do now with Fairfax India - could this then enable a bigger capital base that FFH can potentially earn a performance fee on - is this a fair comment?

 

 

 

 

Edited October 1, 2021 by glider3834

[glider3834]

I did this chart for Fairfax India showing CAGR in share price & book value - notice how they have diverged since 2017 - some narrowing since end of 2020 but still a gap

 

Is there a magic CAGR in BVPS gets them to trade at book value? It is also consistency in results as well.

 

Ignoring the post IPO excitement & ratios in 2015 & 2016, if we look at 2017 the CAGR in BVPS hit 13.5% & they traded at small premium to book (1.04x book value).

 

However, they have mostly traded at a discount to book since 2017 hitting a low point of 0.59 x book value at end of 2020 although in a 'covid' affected market when their CAGR in BVPS fell to 8.7%.

 

If they can move that CAGR in BVPS needle above 12% & do  it consistently, is it reasonable to expect the shares to trade at least at book value? 

 

 

 

 

 

 

 

 

 

Edited October 1, 2021 by glider3834

[dartmonkey]

23 hours ago, Xerxes said:

get a new "mark" closer to BV of $15-20, thereby lifting its carry from $10 to a higher number, thereby helping pushing FFH's BV close to intrinsic value. Why would a third party want to buy a piece of FIH from Prem when they can buy it cheaper on the market. Liquidity perhaps ... 

 

 

 

 

 

 

 

I'm not following this logic. If I wanted to invest in FIH's holdings, wouldn't I be better off getting them through FIH at 60c on the dollar? A 40% discount pays for a lot of years of Fairfax management fees, and the discount is not likely to get even larger.