Fairfax India new issue

[ICUMD]

Despite all the good prospects, Fairfax India is one dog of a stock!   

[gfp]

13 minutes ago, ICUMD said:

Despite all the good prospects, Fairfax India is one dog of a stock!   

 

Decent volume today for this one - easy to get a fill on orders for a change.  Get in there!

[hardcorevalue]

I feel like the bagholder the longer I hold this lol! (and keep paying fees!). Getting smoked by the NSE for a while now. The discount to NAV (and I think the airport is undervalued) Doesn’t sound like the IPO is anytime soon though. Love the airport asset, just kind of crazy that this is down by 25% over the better part of a decade. Hard to keep being a cheerleader even with a lower cost. 

[thowed]

Yep, reminds me of that old Yogi Berra line about in theory and in practice...

 

There are some decent Indian Funds for offshore investors that have outperformed NSE & FIH, and while I am a happy FFH holder, & the airport looks great, I just struggle to see how this will play out.  It may do suddenly, but I don't have the same conviction in it as the parent.

[Junior R]

The stock is truly like watching paint dry. I think if you bought this in the last couple years your not to upset as it has gone up in the last two years....The minute we get an IPO and if its over 3b or the assessed value this stock can jump over night...Its closer then if you bought this stock 10 years ago or when ever it IPO at $10...I have been in and out of this stock many times...My latest position I plan on holding until it gets above $17 (close to book value)...The one thing I learned about this stock is when it comes time to buy or sell large amounts it takes days as there is no volume ...

 

If you bought INDA (etf) when this IPO you would be better off..

[SafetyinNumbers]

INDA started outperforming FIH when the NAV discount started expanding. It seems unlikely the discount grows significantly again from here although anything is possible.

 

My key takeaway post FIH AGM was that the conclusion of the Indian election was a catalyst and the stock is now at its weakest point since the AGM.

 

I can see two potential catalysts:

 

1) a transaction with respect to IDBI which will might highlight FIH’s value as the vehicle FFH is contractually required to use for any non-insurance Indian investments. Privatization is supposed to accelerate when the election is over even if they are unsuccessful on IDBI. Execution is a big risk but FIH might get lots of chances to swing. If they are successful, AUM could grow fast. It’s not clear how/if FIH shareholders would participate in the economics.

 

2) Traction on the Anchorage IPO. The recent DIGIT IPO was an interesting exercise. I can see how retail investors will be more excited about one of the best airports in the world than an insurance company they don’t understand. 

 

Between those two events, BV could be $28 in a short period of time, public assets could be the vast majority of investments held and the fees paid might be mitigated by fees earned from investments managed by FIH on behalf of outside investors. 
 

I have a long term view but I think the odds on these catalysts in the next 12 months is pretty high. 
 

For those with meaningful positions who want to liquidate, please call the company and cross the shares with the buyback. 

 

 

 

[ICUMD]

Good points. 

 

Makes sense to hold past the Indian elections and also see the outcome of the IDBI bidding. 

 

Fairfax India has apparently offered an all cash deal, so they are coming in strong and I assume must have a plan in place.

 

OTOH, their private Indian investments, no matter how strong they are (ie BIAL), are not translating into market price very well. 

 

Anchorage seems like a pipedream to me years after their initial proposal.

[TwoCitiesCapital]

I, for one, am ok with the persistent discount. 

 

The historic execution is there on the BV side. The present execution is there on the buybacks and future opportunities side. I have no doubt that the longer term execution will be there as a result. 

 

The discount won't persist forever if BV performance continues, but am glad for the opportunity to increase my ownership via occasional incremental buys and let FIH increase my ownership for me with time as long as it does persist. 

Edited May 31, 2024 by TwoCitiesCapital

[dartmonkey]

4 hours ago, ICUMD said:

OTOH, their private Indian investments, no matter how strong they are (ie BIAL), are not translating into market price very well. 

 

Anchorage seems like a pipedream to me years after their initial proposal.

 

I'm with TwoCities about the persistent discount - the important thing is that the investments are doing well, and if so, the share price will eventually follow, providing for some additional oomph in the meantime via repurchases. So the private investments have to be strong, but the translation into market price doesn't concern me.

 

Anchorage is the same sort of deal - is the airport doing well, or not? It seems that it is. At over 50% of assets, an IPO would be nice, just to take some cash off the table and to allow for other investments (IDBI?), but there are likely to be opportunities to do the same thing with private investors, so maybe we don't have to worry about whether an IPO happens or not. 

[ICUMD]

19 hours ago, SafetyinNumbers said:

 

For those with meaningful positions who want to liquidate, please call the company and cross the shares with the buyback

Has anyone done this?  How does it work and what was the offer?  When I call to Fairfax India contact  number, I get a generic mailbox.

[Crip1]

6 hours ago, dartmonkey said:

 

I'm with TwoCities about the persistent discount - the important thing is that the investments are doing well, and if so, the share price will eventually follow, providing for some additional oomph in the meantime via repurchases. So the private investments have to be strong, but the translation into market price doesn't concern me.

 

Anchorage is the same sort of deal - is the airport doing well, or not? It seems that it is. At over 50% of assets, an IPO would be nice, just to take some cash off the table and to allow for other investments (IDBI?), but there are likely to be opportunities to do the same thing with private investors, so maybe we don't have to worry about whether an IPO happens or not. 

In and of itself, the persistent discount is not nearly as much a concern as is company performance. The same can be said for Fairfax, incidentally, in that I am less concerned about the multiple to book at which it’s selling but more concerned about whether book value is increasing and, assuming so, at what rate. The discount to BV obviously has a positive in that buying back shares by itself increases BV for the remaining shareholders.

 

On FFHI, if we assume the discount goes on for the indefinite future, then the discussion becomes, assuming one wants exposure to this market, whether it’s better to invest in FFHI or one of the India-centric ETFs. We’re ultimately asking ourselves whether FFHI will deliver alpha. My theory is that FFHI performance will be far more lumpy than the ETFs and that, at some point, price and BV will converge which provides a buffer if alpha is not delivered.

 

-Crip
 

[dartmonkey]

7 minutes ago, Crip1 said:

 

On FFHI, if we assume the discount goes on for the indefinite future, then the discussion becomes, assuming one wants exposure to this market, whether it’s better to invest in FFHI or one of the India-centric ETFs. We’re ultimately asking ourselves whether FFHI will deliver alpha. My theory is that FFHI performance will be far more lumpy than the ETFs and that, at some point, price and BV will converge which provides a buffer if alpha is not delivered.

 

Yes. Ultimately, it is alpha that matters; but whatever Greek letter it might be, some volatility around price:value is a bonus, ultimately, for anyone who is prepared to take advantage of dips (this one has been a long one!) and lighten up on climbs. And even for long-term holders who do neither, if the company does it for them. But that would work better if there were a bit more high points…

[SafetyinNumbers]

9 hours ago, ICUMD said:

Has anyone done this?  How does it work and what was the offer?  When I call to Fairfax India contact  number, I get a generic mailbox.

I haven’t done it with Fairfax but I have with other companies. I usually contact IR or VP Corp Dev and ask them who their buyback broker is? I think for FFH it’s RBC or BMO. 

[ICUMD]

12 hours ago, SafetyinNumbers said:

I haven’t done it with Fairfax but I have with other companies. I usually contact IR or VP Corp Dev and ask them who their buyback broker is? I think for FFH it’s RBC or BMO. 

Thanks very much for the suggestion.

[Junior R]

India stock market hits new all time highs

[hardcorevalue]

1 hour ago, juniorr said:

India stock market hits new all time highs

color me not surprised hah

[Junior R]

20 minutes ago, hardcorevalue said:

color me not surprised hah

lol just need that IPO

[dartmonkey]

5 hours ago, juniorr said:

lol just need that IPO

This is just generous Mr Market giving us one last chance (maybe) to buy FIH at 72% of book value ($1.9b market cap, $2.66b book value). And that is book value calculated with a fair value of $1.6b for FIH's 64% holding of the Bangalore Airport, giving the whole airport a fair value of $2.5b. If FIH is able to float this at anything like the $3.7b valuation they were hoping a year and a half ago, Going from $2.5b to $3.7b would take FIH's book up from $2.66 to $3.42, and at the current price, that would put them at 56% of book (or maybe a little more, since they would have to pay some of this out to Fairfax , since book gains would be substantially over the benchmark of 5% annual. 

 

If that happens, who knows when, something spectacular is going to happen to FIH, either to its price:book or, perhaps, to its share price.

[Cod Liver Oil]

I own some because I like the airport and the story but am well aware of the history of owning assets downstream of a fee collecting parent. Easy to get Flattened (Bruce Flattened). Downstream entities exist to be abused.

Edited June 3, 2024 by Cod Liver Oil

[dartmonkey]

32 minutes ago, Cod Liver Oil said:

I own some because I like the airport and the story but am well aware of the history of owning assets downstream of a fee collecting parent. Easy to get Flattened.

Well, in this case, Bangalore is 50% of book value, and that number might end up being a fair bit higher. Fairfax India pays Fairfax Holdings 20% of book gains over 5% a year, so if the Bangalore Airport ends up generating 20%/year returns, you would lose 3% of that to Fairfax (i.e. 3 out of 20), so you would only get 17%. I could live with a flattening like that.

 

Long and tedious addendum; skip to the last paragraph if this is TL;DR:

 

Here's the company's description of the benchmark:

 

You will recall that under the investment advisory agreement with Fairfax Financial, Fairfax Financial is entitled to a performance fee, calculated at the end of each three-year period, of 20% of any increase in Fairfax India’s BVPS (including distributions) above a non-compounded 5% increase each year from the BVPS at inception in 2015.

 

If book per share was $10 on January 30th, 2015 (see last year's annual report, p. 70), then the benchmark is presumably $10.50 after a year, $11.00 after 2 years, and $11.50 after 3 years, and so on, with the benchmark higher by 50c every year. This is, I think, what is meant by 'non-compounded' in the above quote.  I think this is borne out by my calculation for the fee paid after 3 years, when book value was $15.24 on Dec 31st, 2017, before fees. They probably adjusted for the fact that there were only 11 months in 2015, but roughly, we would expect them to have paid out 20% of book value growth beyond $11.50, which would be 0.2*(15.24-11.50)=0.2*$3.74=$0.75. $0.75 would represent 7.5% of those 52.4% in gains, meaning the gain after fees would be 52.4-7.5%=44.9%, and this corresponds quite closely with the $4.46 book value gain reported. FIH shareholders kept $4.46 out of the $5.24 in book value gains, or 85%. 

 

So I think this calculation is probably correct. But what it means is that, every year, the 5% benchmark means 5% of the original $10 per share book value, not a 5% return on the previous year's book value. This makes no difference in the first year, and only a tiny difference in the next few years, but presuming that FIH's book value continues increasing, it will eventually mean that the benchmark becomes a very small percentage of book. For instance, at 2023 year end, book value was $21.85 (after fees). At the end of 2024, if the book value has increased by 20% (let's be optimistic), it would be $26.22 before fees, a gain of $4.37. Fairfax Holdings would take its 20% fee on the gain minus the benchmark, i.e. $4.37-0.50 = $3.87, 20% of which is $0.77, leaving $4.37-$0.77 = $3.60 for shareholders like us. In other words, we would keep $3.60 our of the $4.37 in book value gains, i.e. 82% of gains, with Fairfax getting 18%.

 

Compare this to 2017, when we paid 15% of gains and paid . As the 50c annual benchmark becomes a smaller and smaller proportion of the book value per share, the performance fee will get closer and closer to 20%. For instance if book value grows by 15% a year over 20 years (it was 14.3% for the first 9 years), the book value per share would go from $164, a 15%  annual gain would $24.55, and we would be paying out 20% of $24.55-$0.50, i.e. essentially 20% of the whole book market gain, with the 50c benchmark, initially 5% of book value, now representing only 0.3% of book value.

 

TL;DR: The performance fee will get a bit worse, because compounding is making the non-compounded benchmark disappear. Eventually we will just pay 20% of all book value gains. It's not a deal-breaker for me, but it's a little worse than paying 20% of the annual gains beyond 5%.

[gfp]

Hmmmm....

https://www.fairfaxindia.ca/press-releases/fairfax-india-announces-management-succession-plan-june-3-2024/?utm_source=newsletter&utm_medium=email&utm_term=Mon+Jun+03+2024&utm_campaign=Fairfax+India+Announces+Management+Succession+Plan

[Junior R]

Quote

 Chandran Ratnaswami will become Executive Vice Chairman of Fairfax India effective July 1, 2024

Isn't this a downgrade?

[Daphne]

Sounds like a step toward retirement

[Viking]

2 hours ago, gfp said:

Hmmmm....

https://www.fairfaxindia.ca/press-releases/fairfax-india-announces-management-succession-plan-june-3-2024/?utm_source=newsletter&utm_medium=email&utm_term=Mon+Jun+03+2024&utm_campaign=Fairfax+India+Announces+Management+Succession+Plan

 

Given Ben's critical role at Fairfax in the coming years this likely makes a lot of sense (as an interim step). Given Prem's age, time for Ben to get more responsibilities. Ben has been pretty focussed on India (based on his comments the past year). 

 

Importantly, Prem and Chandran will still be at Fairfax India and will be able to mentor Ben.

 

----------

From the Corporate Governance Institute

• https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-the-role-of-the-chair-of-the-board/

A good chair provides leadership to the board rather than the company.

 

The chair’s primary role is to ensure that the board is effective in setting and implementing an organisation’s direction and strategy.

 

Therefore, the chair is responsible for leading the board and focusing it on strategic matters, overseeing the company’s business, and setting high governance standards.

 

The chair plays a pivotal role in fostering the effectiveness of the board and individual directors, both inside and outside the board room.

Edited June 3, 2024 by Viking

[StubbleJumper]

31 minutes ago, Viking said:

Given Ben's critical role at Fairfax in the coming years this likely makes a lot of sense (as an interim step). Given Prem's age, time for Ben to get more responsibilities. Ben has been pretty focussed on India (based on his comments the past year). 

 

Time for Ben to earn his stripes.  If you wonder why FFH trades at a discount to some of its comparables, this is an example of the company's ongoing governance issues.

 

 

SJ