Fairfax stock positions

[petec]

I think some warrant might also have converted when Seaspan redeemed debt last month.

[petec]

11 hours ago, Viking said:

Atlas closed today over $15 and at new 52 week high and 6 year high. Perhaps more investors are believing their transformation is for real; especially the revenue and earnings projections for the next 4 years. 
 

This investment is shaping up to be one of Fairfax’s best non-insurance single company investments ever. Stelco also has been hitting new all time highs.

Interestingly, these are two investments that the “why doesn’t he just buy quality compounders” faction on this board hated. And they had good reason to, given Prem’s history with Resolute et al. But I think Prem did three things better this time:

1) buy at the right point in the cycle (years of underinvestment in Atlas’ case, and a sea change in Chinese attitudes to capacity expansion in Stelco’s).
2) buy better balance sheets. 
3) buy better management. 
 

Edit: in Atlas’ case I’d add 

4) structure the deal better. The warrants have been gold.

Edited September 1, 2021 by petec

[Viking]

12 hours ago, nwoodman said:

The latest 13/D shows Fairfax now owns 130,932,826 shares of ATCO common.   A net change of 31.7m. So the warrants were converted and then some?

 

Atlas Corp. Investor Relations - SEC Filings (atlascorporation.com) 25 August 2021

 

Thanks again Viking for all your work on this
 

Cheers

nwoodman

nwoodman, thanks for the info. We should get confirmation when FFH reports Q3. If Fairfax exercises the 25 million warrants would that affect the price they carry the whole position at? (The 99.9 million shares had a carrying value of $10/share at end of Q2). 

[nwoodman]

5 hours ago, Viking said:

If Fairfax exercises the 25 million warrants would that affect the price they carry the whole position at?

It would be very unlike FFH to miss an opportunity to take a +ve mark

[glider3834]

7 hours ago, Viking said:

nwoodman, thanks for the info. We should get confirmation when FFH reports Q3. If Fairfax exercises the 25 million warrants would that affect the price they carry the whole position at? (The 99.9 million shares had a carrying value of $10/share at end of Q2). 

viking I believe if the warrants were exercised at 8.05 per warrant then that should lower the carrying value/cost per share. 

 

 

 

 

Edited September 1, 2021 by glider3834

[glider3834]

2 hours ago, nwoodman said:

It would be very unlike FFH to miss an opportunity to take a +ve mark

I just checked I believe any fair value marks/gains on these warrants up to 30 June have already been taken up by Fairfax in their consolidated earnings - so any gains will be for this current quarter.

[petec]

10 hours ago, nwoodman said:

It would be very unlike FFH to miss an opportunity to take a +ve mark

I think this has been a deliberate policy in the last few years to show the value in the portfolio. But they haven’t taken every opportunity - for example not fully marking Digit to the latest new money valuation. 

[petec]

I think Eurobank and Atlas have a great shot at doing 15% compound returns for a few years now. That’s $3bn performing at the target level, which isn’t a bad start. Let’s see what the rest can do!

[omagh]

On 8/30/2021 at 8:44 PM, bearprowler6 said:

I have a policy not to invest in Chinese based companies so despite the compelling opportunity that BABA appears to offer at the present time; I simply stay away. I put this hard policy into place since I do not trust the business environment in China given the lack of respect for western rule of law.  

 

BTW----I have visited China numerous times over the last 15+ years and traveled extensively throughout the country on numerous occasions. My wife is Chinese and we regularly speak with and get updates on the business and political environment from her friends and family (as recently as Saturday night). The comments that I have received from them especially over the last few years have only reinforced the "no China" investment policy that I already had in place. 

 

So given the choice you offered to me I would have to select Fairfax over BABA however even just thinking that is nearly killing me.

 

 

@bearprowler6 Thanks for the insight into your reasoning.  Although it's a reasonable policy, it reminds me of macro investors who fear the next move by the Fed, an expected recession or a depression and hang back with their special insight into the future.  We each have our own approaches to value investing and portfolio resiliency.  I sleep well regardless of any extraneous events to either FFH or BABA.

[glider3834]

16 hours ago, petec said:

I think Eurobank and Atlas have a great shot at doing 15% compound returns for a few years now. That’s $3bn performing at the target level, which isn’t a bad start. Let’s see what the rest can do!

I agree petec I think Eurobank share price at 0.82 euro is at around 0.58 x TBV & looking at recent earnings report on nearly every metric from operating profitability through to capital strength they are showing great progress with a dividend potentially starting in 2022. I think provided economic recovery continues in Greece & Europe, then with a bit of multiple expansion,  a 15% annualised return for next few years is possible for this investment for Fairfax.

 

If Eurobank averages 7.5% ROTBV over next 3 years (it was 7.7% for 1H21) , then ignoring dividends TBV would move from 1.40 to 1.73 over 3 years. Then if shares trade at 1.24 or 0.71 x TBV (a pretty modest multiple)  in 3 years, then that would give us that 15% compounded return.

[Viking]

5 hours ago, glider3834 said:

I agree petec I think Eurobank share price at 0.82 euro is at around 0.58 x TBV & looking at recent earnings report on nearly every metric from operating profitability through to capital strength they are showing great progress with a dividend potentially starting in 2022. I think provided economic recovery continues in Greece & Europe, then with a bit of multiple expansion,  a 15% annualised return for next few years is possible for this investment for Fairfax.

 

If Eurobank averages 7.5% ROTBV over next 3 years (it was 7.7% for 1H21) , then ignoring dividends TBV would move from 1.40 to 1.73 over 3 years. Then if shares trade at 1.24 or 0.71 x TBV (a pretty modest multiple)  in 3 years, then that would give us that 15% compounded return.

Eurobank today is a misunderstood company. Its management team looks pretty good (if not stellar) to me. It has done a complete transformation over the past 4 or 5 years. Merged with Grivalia creating a large fee generating real estate division. Its has been aggressively dealing with its no-performing loan issue; the Mexico transaction will be done by year end. That Covid was a pothole and did not cause the car (company) to drive off the road speaks volumes for where the company is at. The bank is now moving to its front foot and actually making investments in its business - small acquisitions in Serbia and Cypress and growth in its real estate platform. As the ship turns i think the Eurobank management team will have lots of low hanging fruit to pick to really drive earnings in the coming years. The greek government is very pro business and this is helping. The key now is how fast the Greek economy grows in 2H 2021 and 2022. 
 

I think there is a good chance Eurobank shares will do better than 15% per year for the next three years from where they are trading today. But it might take another 9 to 12 months for the stock to really start to move. 
 

it is a great example of a company narrative that investors have today that is completely wrong. The Eurobank of today is not the Eurobank of 5 years ago. 
 

edit: here is the link to the 1H Presentation the bank did with Q2 earnings: https://www.eurobankholdings.gr/en/investor-relations/presentations

Edited September 3, 2021 by Viking

[petec]

34 minutes ago, Viking said:

Eurobank today is a misunderstood company. Its management team looks pretty good (if not stellar) to me. It has done a complete transformation over the past 4 or 5 years. Merged with Grivalia creating a large fee generating real estate division. Its has been aggressively dealing with its no-performing loan issue; the Mexico transaction will be done by year end. That Covid was a pothole and did not cause the car (company) to drive off the road speaks volumes for where the company is at. The bank is not moving to its front foot and actually making investments in its business - small acquisitions in Serbia and Cypress and growth in its real estate platform. As the ship turns i think the Eurobank management team will have lots of low hanging fruit to pick to really drive earnings in the coming years. The greek government is very pro business and this is helping. The key now is how fast the Greek economy grows in 2H 2021 and 2022. 
 

I think there is a good chance Eurobank shares will do better than 15% per year for the next three years from where they are trading today. But it might take another 9 to 12 months for the stock to really start to move. 
 

it is a great example of a company narrative that investors have today that is completely wrong. The Eurobank of today is not the Eurobank of 5 years ago. 

I agree with both and would add that Greece is just about the issue not country on earth that has been in a depression - a proper, 1930s style depression - for the last decade. It’s coming out of that, and that’s a great environment for a bank. 
 

I actually think that at this price, Eurobank will be able to pay close to a 15% *dividend*. It will probably retain more earnings to grow, but it’s a pretty incredible thought. Capital generation given the tax assets, real estate uplift, and dead loans coming alive again is going to be spectacular. 

[glider3834]

43 minutes ago, petec said:

I agree with both and would add that Greece is just about the issue not country on earth that has been in a depression - a proper, 1930s style depression - for the last decade. It’s coming out of that, and that’s a great environment for a bank. 
 

I actually think that at this price, Eurobank will be able to pay close to a 15% *dividend*. It will probably retain more earnings to grow, but it’s a pretty incredible thought. Capital generation given the tax assets, real estate uplift, and dead loans coming alive again is going to be spectacular. 

thats interesting - how did you get to 15% for 'potential' dividend - that would be around 0.12 euro per share?

[petec]

Well, they’re talking about 10% roe from 2022/23. That implies 14-15c in operating eps. Cash generation is better than that because of the tax asset. And then there’s potential capital upside in the RE portfolio (rising rents as the economy reflates, and falling cap rates). 
 

So it all depends on the payout ratio - how much they want to retain and how much they are forced to retain. But the potential is there for a high yield. 

[glider3834]

On 9/3/2021 at 6:12 PM, petec said:

Well, they’re talking about 10% roe from 2022/23. That implies 14-15c in operating eps. Cash generation is better than that because of the tax asset. And then there’s potential capital upside in the RE portfolio (rising rents as the economy reflates, and falling cap rates). 
 

So it all depends on the payout ratio - how much they want to retain and how much they are forced to retain. But the potential is there for a high yield. 

thanks petec well if they can hit their 10% ROE target then there would probably be significant upside for Eurobank given current price/TBV level IMO- I noticed this ECB article which interestingly notes that banks with higher valuations also tended to have higher dividend payout ratios   https://www.ecb.europa.eu/pub/financial-stability/fsr/focus/2020/html/ecb.fsrbox202005_05~d3679873d3.en.html

 

I guess regulators will have to balance dividends with ensuring Eurobank continues to maintain its capital strength, but I suspect any dividend reinstatement would be a net positive for Eurobank shares.

[glider3834]

I don't live in Canada I am Sydney based - but has anyone visited any of the Recipe owned/franchised restaurants since the covid dining restrictions were eased in Jun-21 - would be interesting to get some feedback on how busy they are? 

 

Recipe is a significant non-insurance subsidiary for Fairfax & Prem mentioned on the Q2 2021 conference call he expected they could get back to 2019 sales levels 

 

Prem Watsa

Yes, Jaeme. All of those things, including the restaurants, we think the revenues will be through 2019 levels once we back up. And unfortunately, lots of smaller restaurants have gone out of business. And so, if you want to go out dining, the big restaurant chains are where the action is going to be and our Recipe expects in the years to come to do well.

 

 

(from Q2 2021 MD&A - Recipe)

 

Looking at the Restaurants & Retail segment, I estimate around 40-45% of revenue is from Recipe and I expect Recipe to contribute most of the pre-tax income (before interest expense & other).

 

In 2019, Restaurants & Retail generated around $71 mil in pre-tax income before interest & other (see below) versus the first 6 months of 2021 where it has only generated -$1.5mil (see above) while under the effects of Covid.

 

 

Also worth mentioning that these revenue & income numbers are not pro-rata for Fairfax's share ie. non-controlling interests are subtracted out further down the Consolidated Earnings Statement.

 

 

 

 

 

 

 

[StubbleJumper]

4 hours ago, glider3834 said:

I don't live in Canada I am Sydney based - but has anyone visited any of the Recipe owned/franchised restaurants since the covid dining restrictions were eased in Jun-21 - would be interesting to get some feedback on how busy they are? 

 

 

 

 

 

 

 

I went to a Montana's restaurant for supper a week ago Monday, and it seemed about normal to me.  It looked like they might have pulled one or two tables out of the dining room in an effort to promote social distancing, but of the remaining tables, about 70% were occupied.  That's not too bad for a Monday night, which was actually Labour Day Monday.  I went to a competing chain restaurant for supper on Wednesday last week and it was a similar story, about 75% full.  

 

The business seems to be coming back, but I wonder how many of the anti-vaxxers are also restaurant patrons?  There are already vaccine passports required in Quebec, and they will soon be implemented in Ontario.  Are the 15% of unvaxxed also heavy restaurant users?

 

 

SJ

[Xerxes]

The Keg has been more or less busy this summer. Maybe not to full full capacity but seemed busy.

Harvey's is always busy as a take out joint. It seemed busy in Montreal even at the depth of the pandemic with its drive-through re-assuring its customer with the same tasty burgers.

 

Tim Hortons, on the other hand, (not Watsa property but a Ackman property) except for drive-through lost a good chunk of its business. Used to be a hang out place for a more senior customer base.   

[Viking]

Glider, i prefer to eat at independent restaurants so i cannot comment specifically about Recipe’s concepts here. My current read is it will be some time before restaurants in Canada see 2019 levels of profitability. However, i do expect the big chains, like those owned by Recipe, to outperform independent restaurants (who have fewer resources). Also, Recipe does not actually own most of the restaurants so the payments Recipe receives may actually rebound nicely as inflation hits the sector. 
 

It looks to me like the restaurant business is going to slowly improve (in terms of year ago comps). But the Delta variant is likely to slow any return to 2019 numbers. And labour shortages for the industry will also be a headwind for profitability.
 

It will be interesting to see how Recipe performs in the current environment. Slow improvement (compared to prior year) is my current guess which should benefit Fairfax’s reported results moving forward.

Edited September 13, 2021 by Viking

[Viking]

With natural gas prices spiking and perhaps going higher into the fall/winter EXCO Resources might be a company to watch. 

Fairfax owns 44% of EXCO; private holding

Valued at US$238 million at Dec 31, 2020

——————————

Based on Francis Chou’s 2H commentary EXCO appears to be levered to natural gas:

 

“EXCO Resources Inc. (“EXCO”)
In early July 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted into 28.38 equity shares for every US$1,000 in par value, after netting out certain adjustments. We received 1,518,570 shares of EXCO in the Fund. The equivalent price was US$9.51 per share of EXCO.

Looking back on this investment, we underestimated how long the price of natural gas would stay low for and how low it has been relative to the price of oil. Historically, there had been a strong relationship between the prices of oil and natural gas. Thinking about the two fuels in terms of energy equivalency, 6,000 cubic feet (6 mcf) of natural gas has the same amount of energy content as 1 barrel of oil. In the past, this 6 to 1 ratio guided the relationship between oil and natural gas prices but for the last few years the ratio between prices has gone up to as high as 50 to 1.

Long story short, it was not such a great idea to invest in the 1.75 lien term loans of EXCO.

- http://choufunds.com/pdf/SEMI-AR 2021 EN.pdf

—————-

2020 AR Page 28: Fairfax owns 44% of Exco, a U.S. oil and gas producer. Despite weak energy prices in 2020, Exco generated $128 million in EBITDA and $36 million in free cash flow. Net debt fell to $145 million (1.1 times EBITDA). Led by Chairman John Wilder and CEO Hal Hickey, Exco achieved these results through high field level productivity and company-wide cost control. In December, Exco recorded its 73rd month without a lost time incident. Exco’s Chairman, John Wilder, is a great partner. We are well served by his leadership.

 

Page 70: On June 28, 2019 EXCO Resources Inc. (‘‘EXCO’’) emerged from bankruptcy protection and settled the company’s holdings of EXCO bonds with common shares, resulting in the company recording a net loss on investment of $179.3 (realized losses of $296.3, of which $117.0 was recorded as unrealized losses in prior years).

[petec]

51 minutes ago, Viking said:

With natural gas prices spiking and perhaps going higher into the fall/winter EXCO Resources might be a company to watch. 

 

Fairfax owns 44% of EXCO; private holding

Valued at US$238 million at Dec 31, 2020

——————————

Based on Francis Chou’s 2H commentary EXCO appears to be levered to natural gas:

 

“EXCO Resources Inc. (“EXCO”)
In early July 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted into 28.38 equity shares for every US$1,000 in par value, after netting out certain adjustments. We received 1,518,570 shares of EXCO in the Fund. The equivalent price was US$9.51 per share of EXCO.

Looking back on this investment, we underestimated how long the price of natural gas would stay low for and how low it has been relative to the price of oil. Historically, there had been a strong relationship between the prices of oil and natural gas. Thinking about the two fuels in terms of energy equivalency, 6,000 cubic feet (6 mcf) of natural gas has the same amount of energy content as 1 barrel of oil. In the past, this 6 to 1 ratio guided the relationship between oil and natural gas prices but for the last few years the ratio between prices has gone up to as high as 50 to 1.

Long story short, it was not such a great idea to invest in the 1.75 lien term loans of EXCO.

- http://choufunds.com/pdf/SEMI-AR 2021 EN.pdf

—————-

2020 AR Page 28: Fairfax owns 44% of Exco, a U.S. oil and gas producer. Despite weak energy prices in 2020, Exco generated $128 million in EBITDA and $36 million in free cash flow. Net debt fell to $145 million (1.1 times EBITDA). Led by Chairman John Wilder and CEO Hal Hickey, Exco achieved these results through high field level productivity and company-wide cost control. In December, Exco recorded its 73rd month without a lost time incident. Exco’s Chairman, John Wilder, is a great partner. We are well served by his leadership.

 

Page 70: On June 28, 2019 EXCO Resources Inc. (‘‘EXCO’’) emerged from bankruptcy protection and settled the company’s holdings of EXCO bonds with common shares, resulting in the company recording a net loss on investment of $179.3 (realized losses of $296.3, of which $117.0 was recorded as unrealized losses in prior years).

That’s a very good point. Exco could be printing cash if they’re not over-hedged. 

[Viking]

A good question for Prem on the next quarterly call would be what the thinking is behind holding the commodity type equities. Inflation hedge? Long term holds (i.e. commodity super cycle)? Or will Fairfax be opportunistic and monetize over time - perhaps starting in 2022? 
 

Fairfax owns a pretty diversified group (by commodity exposure) with a North American geographic focus. Their combined exposure to commodity equities is likely now worth north of US$1.5 billion; pretty decent position size (12-13% ?) when compared to just total equity holdings.

- Stelco (steel) - about US $500 million position

- Resolute (forestry/lumber) - $350 million

- EXCO Resources (energy) - $240 million Dec 2020

- Altius (diversified royalty including potash) - warrants giving 13.4% ownership

- Astarta (Agriculture - Ukraine) - $95 million

- Foran Mining (metals) - recent $80 million - this investment will likely take years to play out

PS: i view Farmers Edge as a technology/start up type company; not a traditional commodity type investment. 

 

Edited September 13, 2021 by Viking

[glider3834]

interesting insights on Recipe's business/restaurant environment thanks guys  - sounds like we will see improving results but will take time 

[glider3834]

On 9/1/2021 at 6:51 PM, petec said:

Interestingly, these are two investments that the “why doesn’t he just buy quality compounders” faction on this board hated. And they had good reason to, given Prem’s history with Resolute et al. But I think Prem did three things better this time:

1) buy at the right point in the cycle (years of underinvestment in Atlas’ case, and a sea change in Chinese attitudes to capacity expansion in Stelco’s).
2) buy better balance sheets. 
3) buy better management. 
 

Edit: in Atlas’ case I’d add 

4) structure the deal better. The warrants have been gold.

Atlas closed $16.28 a share -  assuming 122 mil shares (excluding Riverstone Europe 9 mil shares) - looks to be close to a $2 bil position now for Fairfax 

 

 

[petec]

5 hours ago, glider3834 said:

Atlas closed $16.28 a share -  assuming 122 mil shares (excluding Riverstone Europe 9 mil shares) - looks to be close to a $2 bil position now for Fairfax 

 

 

I would include the Riverstone shares. They have the option to buy them at YE19 prices, and they if I understood the q2 correctly they mark that option to market. 
 

A superb, and superbly structured, investment by Prem and the team. 

Edited September 16, 2021 by petec