Fairfax India new issue

[MMM20]

So what exactly is India going to do? Nationalize Fairfax’s investments? Do they or do they not own ~74% of Digit? What a bureaucratic farce.

[cwericb]

On 9/21/2023 at 4:35 PM, gfp said:

Certainly not ideal if you are a Canadian company patiently waiting for multiple government approvals in India.

Yup!

[Haryana]

2 hours ago, MMM20 said:

So what exactly is India going to do? Nationalize Fairfax’s investments? Do they or do they not own ~74% of Digit? What a bureaucratic farce.

 

Are you saying this sarcastically or asking with real concern?

 

[MMM20]

11 hours ago, Haryana said:

 

Are you saying this sarcastically or asking with real concern?

 

I’m really trying to understand why we’re coming up on two years (?) of delays on FFH’s conversion from 49% to 74% ownership in Digit. What’s actually going on? Are the bureaucrats trying to extract a pound of flesh and Prem not having it? Are we about to find out that, sorry, no, Canadians can’t actually own Indian assets without some beyond extortionate fees/taxes? Just seems like more and more of a shitshow and I’m genuinely wondering how Fairfax India investors get comfortable with worsening political dynamics when protectionist bureaucratic nonsense was already a major risk.
 

Is that too reactionary? I am genuinely wondering what Fairfax India investors think about all this right now.

 

I am frustrated with it as a FFH investor, but Digit is still only a few percentage points of FFH GAV, so it’s annoying but doesn’t break the thesis.

 

Edited September 23, 2023 by MMM20

[glider3834]

10 hours ago, MMM20 said:

I’m really trying to understand why we’re coming up on two years (?) of delays on FFH’s conversion from 49% to 74% ownership in Digit. What’s actually going on? Are the bureaucrats trying to extract a pound of flesh and Prem not having it? Are we about to find out that, sorry, no, Canadians can’t actually own Indian assets without some beyond extortionate fees/taxes? Just seems like more and more of a shitshow and I’m genuinely wondering how Fairfax India investors get comfortable with worsening political dynamics when protectionist bureaucratic nonsense was already a major risk.
 

Is that too reactionary? I am genuinely wondering what Fairfax India investors think about all this right now.

 

I am frustrated with it as a FFH investor, but Digit is still only a few percentage points of FFH GAV, so it’s annoying but doesn’t break the thesis.

 

So just on your BV question re Digit, not a legal expert here but looks like Fairfax has recognised the fair value gain on the Compulsory Convertible Preferred Shares in Go Digit Infoworks (majority owner of Digit Insurance), not the fair value gain under IFRS they would receive on their equity shares on achieving majority ownership or control  of Digit. 

 

On your Nationalisation question. My view is foreign Investment is critical to India's & Modi's current  strategy to drive economic growth and strategic objectives (incl national security etc) - we have seen Modi flying all over the world in recent months meeting with world & businesses leaders eg Big Tech CEOs etc to encourage them to bring foreign investment to India. Any threat to nationalise here over this issue, would would undermine all this work & run counter to that strategy. And you have to look at Modi's economic track record as well which has been pro-business. So I think this is a low risk here IMHO.

 

Edited September 23, 2023 by glider3834

[Haryana]

15 hours ago, MMM20 said:

Just seems like more and more of a shitshow and I’m genuinely wondering how Fairfax India investors get comfortable with worsening political dynamics when protectionist bureaucratic nonsense was already a major risk.
 

Is that too reactionary? I am genuinely wondering what Fairfax India investors think about all this right now.

 

I am frustrated with it as a FFH investor, but Digit is still only a few percentage points of FFH GAV, so it’s annoying but doesn’t break the thesis.

 

In terms of the term "shitshow", I think of this video at 7:57 about the real shitshow of Western Adult Entertainment!

 

 

[nwoodman]

12 hours ago, glider3834 said:

So just on your BV question re Digit, not a legal expert here but looks like Fairfax has recognised the fair value gain on the Compulsory Convertible Preferred Shares in Go Digit Infoworks (majority owner of Digit Insurance), not the fair value gain under IFRS they would receive on their equity shares on achieving majority ownership or control  of Digit. 

 

On your Nationalisation question. My view is foreign Investment is critical to India's & Modi's current  strategy to drive economic growth and strategic objectives (incl national security etc) - we have seen Modi flying all over the world in recent months meeting with world & businesses leaders eg Big Tech CEOs etc to encourage them to bring foreign investment to India. Any threat to nationalise here over this issue, would would undermine all this work & run counter to that strategy. And you have to look at Modi's economic track record as well which has been pro-business. So I think this is a low risk here IMHO.

 

Further to this SEBI is under the pump and in a bit of a transition phase.   Madhabi Puri Buch took charge of the regulator in March 2022. She is the first non-bureaucrat to hold the post and is trying to put in systems to ease the bureaucracy.  It sucks but from everything I have read there has been a few go rounds on the IPO but no show stoppers.  The conversion and IPO are tied at the hip IIRC.

 

Edit: Not excusing the situation.  It must drive the team at Fairfax nuts at times.  However I am sure they sleep easy with the recent life insurance license approval from the IRDAI.  To me this gives them a massive play, once they have scale on, much needed infrastructure.  Very accretive to their view of what constitutes a 100 year business.

Edited September 24, 2023 by nwoodman

[glider3834]

disclaimer - below figures could be wrong - this is not investment advice & always do your own due diligence

 

So this is just a snapshot of top 5 holdings of Fairfax India representing 83% of their total assets vs their YE Mar 2023 net income

 

If we ignore BIAL, the 2nd to 5th largest holdings, trading on a FY23 PE of 10.7 x (using avg exchange USD/INR rate of 80.31)  but note I haven't looked deeply into operating earnings of these businesses.

 

With BIAL I don't regard the earnings number below as meaningful as T2 was only just starting to open up in January & T2 is still not operating at capacity. But in 2019 the net earnings for BIAL was 68M (for T1 only). Also I have noted 52% economic ownership below for BIAL but assuming FIH buy another 7% from Zurich later this year, this should move to 59%. 

 

 

 

 

Edited October 1, 2023 by glider3834

[giulio]

@glider3834 thanks for the analysis! I think fih will own 64% of bial after the last tranche closes. 50.6% directly and 13.4% through Anchorage 

[glider3834]

1 hour ago, giulio said:

@glider3834 thanks for the analysis! I think fih will own 64% of bial after the last tranche closes. 50.6% directly and 13.4% through Anchorage 

no worries - they would control 64% of BIAL but I think underlying ownership is then split FIH 59% (direct & via Anchorage) & OMERS 5%.

[SafetyinNumbers]

3 hours ago, glider3834 said:

disclaimer - below figures could be wrong - this is not investment advice & always do your own due diligence

 

So this is just a snapshot of top 5 holdings of Fairfax India representing 83% of their total assets vs their YE Mar 2023 net income

 

If we ignore BIAL, the 2nd to 5th largest holdings, trading on a FY23 PE of 10.7 x (using avg exchange USD/INR rate of 80.31)  but note I haven't looked deeply into operating earnings of these businesses.

 

With BIAL I don't regard the earnings number below as meaningful as T2 was only just starting to open up in January & T2 is still not operating at capacity. But in 2019 the net earnings for BIAL was 68M (for T1 only). Also I have noted 52% economic ownership below for BIAL but assuming FIH buy another 7% from Zurich later this year, this should move to 59%. 

 

 

 

 

IIFL Finance also looks cheaper vs consensus estimates. It’s interesting they sold some recently to help fund the additional BIAL purchase. If they also use it for buybacks, arguably, they buy IIFL Finance back at a big discount too!

 

From sharing the idea with others it seems like the biggest reason I hear from investors for not owning Fairfax India is the fee structure. In reality, cheap NAV plays without known catalysts to close the discount seem like they will permanently trade cheap (see E-L Financial). The real reasons are no analyst coverage, low liquidity, unpredictable earnings and not being in a relevant benchmark.
 

There is just too much competition from liquid cheap stocks with catalysts i.e. energy, uranium etc and the fee structure is a narrative to explain the discount for not wanting to own stock since markets are supposed to be efficient.

 

What do you all think?

[TwoCitiesCapital]

55 minutes ago, SafetyinNumbers said:

 

There is just too much competition from liquid cheap stocks with catalysts i.e. energy, uranium etc and the fee structure is a narrative to explain the discount for not wanting to own stock since markets are supposed to be efficient.

 

What do you all think?

 

I tend to agree. This traded at a large premium for awhile post-IPO. The fee structure was the same. Nobody was arguing why it should trade at a discount back then - they were justifying the premium. 

 

It's all sentiment driven. They make the narrative fit the share price. 

[SafetyinNumbers]

On 9/17/2023 at 6:38 PM, SafetyinNumbers said:

I’m wondering how much the discount can close in the 3 months before the VWAP period begins! Might still take an SIB to make a meaningful difference.

We didn’t see an SIB but the buyback picked up just over 1m shares in September 

[patterson]

Does anyone have insight as to why Fairfax India would be down 27+ percent after hours? I don't see any news, but just a single 100 share transaction at 8.87. https://www.nasdaq.com/market-activity/stocks/ffxdf/after-hours-trades.

[patterson]

Just now, patterson said:

Does anyone have insight as to why Fairfax India would be down 27+ percent after hours? I don't see any news, but just a single 100 share transaction at 8.87. https://www.nasdaq.com/market-activity/stocks/ffxdf/after-hours-trades.

My understanding is that this is just FFXDF and not the Canadian shares, so I'm not saying it will open down 27 percent on Monday. However, I'm just not sure why shares would change hands at such a price. 

[SafetyinNumbers]

1 hour ago, patterson said:

My understanding is that this is just FFXDF and not the Canadian shares, so I'm not saying it will open down 27 percent on Monday. However, I'm just not sure why shares would change hands at such a price. 

I have seen a bad tick there before. I doubt its a real trade.

[gfp]

https://www.globenewswire.com/news-release/2023/11/02/2772911/0/en/Fairfax-India-Holdings-Corporation-Third-Quarter-Financial-Results.html

 

"At September 30, 2023 common shareholders' equity was $2,833.4 million, or book value per share of $20.89"

 

"

• The company continued to buy back shares under its normal course issuer bid and during the first nine months of 2023 purchased for cancellation 2,609,481 subordinate voting shares at a net cost of $33.9 million ($12.98 per subordinate voting share)."

[LC]

Which is frankly not a whole lot, it's an incremental 1M shares repurchased in the Q...with like 137M outstanding.

 

Understand they probably want to retain capital for growth but that's like a 2.5% annual repurchase, and I'm not netting out share issuances.

[TwoCitiesCapital]

16 hours ago, LC said:

Which is frankly not a whole lot, it's an incremental 1M shares repurchased in the Q...with like 137M outstanding.

 

Understand they probably want to retain capital for growth but that's like a 2.5% annual repurchase, and I'm not netting out share issuances.

 

I also wish the repurchases were bigger, but understand this was intended to be a permanent vehicle and quickly taking it under my be counter productive. 

 

But even 2.5% annual rate @ a 35% discount to NAV results in near 4% annual BV growth solely from the repurchases w/o considering the investments so in generally good with a +4% spread of alpha to the underlying investments. 

[vinod1]

3 hours ago, TwoCitiesCapital said:

 

I also wish the repurchases were bigger, but understand this was intended to be a permanent vehicle and quickly taking it under my be counter productive. 

 

But even 2.5% annual rate @ a 35% discount to NAV results in near 4% annual BV growth solely from the repurchases w/o considering the investments so in generally good with a +4% spread of alpha to the underlying investments. 

 

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

Vinod

Edited November 3, 2023 by vinod1

[Haryana]

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

 

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

 

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

 

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

 

[ICUMD]

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

[This2ShallPass]

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

 

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

 

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

 

[This2ShallPass]

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

 

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

 

[MMM20]

6 hours ago, This2ShallPass said:

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

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