Fairfax stock positions

[dartmonkey]

Underlying ownership Fairfax has 59% and OMERS 5% - it gets consolidated in FIH books with 64% BIAL controlling stake as Asset and 5% non-controlling interest in Equity.

 

ok, got it that makes perfect sense, thanks. So FIH really does only own 59%, not 64% (up this year from 49%, not 54%.)

[giulio]

https://www.theglobeandmail.com/business/article-westbridge-renewable-closes-deal-to-sell-first-of-five-solar-power/

[giulio]

FFH investment team has been playing merger arbs pretty well this year: X, ATVI, DICE, ARCE, PRVB, FSTX, VIVO. 

CPRI was a recent buy.

Small positions but I am impressed.

 

G

[Xerxes]

 

The AI machine continues to send useless updates on an irrelevant equity portfolio

[benchmark]

14 hours ago, giulio said:

FFH investment team has been playing merger arbs pretty well this year: X, ATVI, DICE, ARCE, PRVB, FSTX, VIVO. 

CPRI was a recent buy.

Small positions but I am impressed.

 

G

when do you expect that CPRI deal to close? 

[This2ShallPass]

On 12/18/2023 at 10:30 PM, benchmark said:

when do you expect that CPRI deal to close? 

I started looking into this after seeing @giulio post, definitely a good merger arb oppty. 

 

In Tapestry's earnings call they say transaction expected to close in calendar '24, nothing specific. I only do these arbs with long puts, so timeframe is imp to get decent return.

 

[giulio]

I havo no position, no idea how it unfolds. My post was to highlight the FFH team hot hand.

Best of luck to those playing the merg arb! 

[benchmark]

18 hours ago, This2ShallPass said:

In Tapestry's earnings call they say transaction expected to close in calendar '24, nothing specific. I only do these arbs with long puts, so timeframe is imp to get decent return.

Did you mean to something like buying Jan 25 45 puts, for example? 

[bargainman]

Sorry if this is a dumb question, but has FFH's stock portfolio over/underperformed indices over time?

[Viking]

5 hours ago, bargainman said:

Sorry if this is a dumb question, but has FFH's stock portfolio over/underperformed indices over time?

@bargainman I have looked at Fairfax in lots of different ways over the years but i have never attempted that type of analysis - there are so many important moving/unknown parts i am not sure it can be done in a quality way. One of the challenges is we have incomplete information - Fairfax has lots of equity investments that are of significant size that we know nothing about. Fairfax is also very active - positions change. Part of the analysis would need to include dividends. And what do you include? Do you include the TRS-FFH? How do you value a company like AGT Food Ingredients? Or Bauer Hockey? Or the significant private equity holdings? 
 

The other question: what benchmark should be used? S&P500, which is dominated by 7 or 8 companies?
 

At the end of the day, from my perspective, what really matters is total return on the total investment portfolio. And how does Fairfax’s performance compare to peers?
 

That we can take a stab at. My math says Fairfax is tracking to earn 8.1% in 2023. And my estimate is for Fairfax to earn around 7.2% in 2024 and 2025. My estimates for 2024 and 2025 assume zero from large asset sales / revaluations - which i think will be wrong. My guess is Fairfax will continue to monetize/revalue some assets in the coming years so 7.2% will likely be more like 7.5% or higher.

 

My guess is Fairfax is earning best-in-class total returns on its total investment portfolio when compared to other P/C insurance companies (most of whom are likely earnings in the 4 to 5% total return range). And I expect the large outperformance by Fairfax to persist in the current environment (where active management matters once again).

—————

Another approach would be to look at Fairfax’s largest equity investments. The big three are Eurobank, Poseidon and FFH-TRS. These three holdings represent about 33% of Fairfax’s equity holdings. 
 

If you look at Fairfax’s top 12 holdings, that would get you to about 60% of their equity holdings. That might be a pretty good proxy for how the total equity portfolio was performing. 

Edited December 28, 2023 by Viking

[StubbleJumper]

10 hours ago, bargainman said:

Sorry if this is a dumb question, but has FFH's stock portfolio over/underperformed indices over time?

 

 

In the past, Prem routinely included a small table in his annual letter, depicting FFH's return on common stocks, the return on the S&P500, FFH's return on bonds and the Merrill Lynch Corporate Bond Index (an example of that table can be found on page 17 of Prem's 2015 letter).  For me, the general insight over the years from that table is that FFH's true strength was fixed income investing, which is a good thing for an insurance company that must keep two-thirds or three-quarters of its investments in fixed income products.

 

In a more general sense, it's worth reading and re-reading Prem's annual letter several times.  He includes several tables that are key to understanding the prevailing economic conditions of the insurance industry and how FFH has generated wealth (or not!) within those economics conditions.  When Prem includes a table or a section on a particular subject, it's usually there for a very good reason.  I am not too sure why the table on investment returns disappeared over time.  Perhaps it was that FFH had a period of unfavourable comparisons to the index, or as @Viking perhaps it's because such a large chunk of FFH's investments are private placements or otherwise unusual investments.  Or perhaps with M2M accounting, Prem figures that shareholders don't really need that little table anymore because we can more or less figure it out ourselves?

 

Not sure.

 

 

SJ

[Jaygo]

A question is why do these companies not just index. 
 

if the business of insurance is good why have a side business of investing. There are some funds that do 20% a year. Why not leave it to those guys or the index and focus on your business of insurance?

 

we all have dogs but when I look at ffh it’s seems like some real mutts. Blackberry, recipe corp with the crappiest restaurants, shipping companies, 

 

I’m not a billionaire nor so successful people know me on the streets, so instead of criticizing I’m just really curious about it. 
 

I actually think brk is the same and really hope Greg starts to unwind the investments  portfolio so it makes up a much smaller part of the business. Using the proceeds to shrink the equity at these very reasonable prices compared to the greater market. 

 

 

[Xerxes]

That matrix table that shows gain/loss, unrealized/realized, fixed-income/stocks was never very clear in terms what goes in the equity portion.

 

A lot of good stuff didn’t make it to the table. ICICI Lombard when it was realized (and that was no even fully owned). That piece of business they sold in Asia pre-Covid. 
 

To me a business is a business. Whether there is a liquid secondary market for its shares or not is an irrelevant criteria to have for inclusion to that infamous table. 

[MMM20]

1 hour ago, Jaygo said:

A question is why do these companies not just index. 

 

This is a better question for the MKL board

 

FFH goes for it with some big positions, even if they're not everyone's cup of tea. I believe roughly a half dozen investments (across everything) add up to roughly half the NAV. The same is roughly true for BRK. I don't think it's anywhere close to that for MKL nowadays, but please correct me if I'm wrong.

 

Also, I ask myself a similar question about short selling. Why bother with a few insignificant short positions if they're just another thing to track and never move the needle? I think the answer is it makes you better as a long investor to be able to adopt the mindset and framework of a short seller.

 

The same is probably true of Fairfax with their big positions, even something like the GFC big short, the Digit investment, or maybe even the mid 2010s insurance acquisitions. Would they have pulled these things off if they simply indexed? Maybe not!

 

So you take the good with the bad and focus on where it all nets out. And the result has been pretty damn good over a pretty damn long time period.

 

Edited December 28, 2023 by MMM20

[StubbleJumper]

1 hour ago, Jaygo said:

A question is why do these companies not just index. 
 

if the business of insurance is good why have a side business of investing. There are some funds that do 20% a year. Why not leave it to those guys or the index and focus on your business of insurance?

 

we all have dogs but when I look at ffh it’s seems like some real mutts. Blackberry, recipe corp with the crappiest restaurants, shipping companies, 

 

I’m not a billionaire nor so successful people know me on the streets, so instead of criticizing I’m just really curious about it. 
 

I actually think brk is the same and really hope Greg starts to unwind the investments  portfolio so it makes up a much smaller part of the business. Using the proceeds to shrink the equity at these very reasonable prices compared to the greater market. 

 

 

 

The short answer is that Prem Watsa is an investor who had a side-business of insurance, not an insurance guy who had a side-business of investing.  The motivation for Prem ever buying an insurance company was likely for the simple reason of having access to large gobs of other people's money to invest (ie, large gobs of float).

 

 

SJ

[SafetyinNumbers]

In the most inefficient market I have ever seen, I think an unconstrained investor like FFH has the potential to generate strong absolute returns over a long period of time. It’s what gets me really excited about the right tail.
 

If you want a holdco that owns the index (VOO) and has money invested with the GARP investment style (UNC.TO EVT.TO), you should consider E-L Financial. It trades at a ~50% discount NAV despite its holdings being closer to what most investors prefer i.e. passive or quality.

[bargainman]

The reason I ask is because many years ago I decided I would invest with Buffett and his acolytes in value investing. I purchased Berkshire, Fairfax, Markel, Leucadia(now, Jeffries), fairholme, wintergreen even.  

 

Other than Berkshire, they have all significantly underperformed.

[Santayana]

When did you first purchase Fairfax, and have you added to the position over time?

[Viking]

1 hour ago, bargainman said:

The reason I ask is because many years ago I decided I would invest with Buffett and his acolytes in value investing. I purchased Berkshire, Fairfax, Markel, Leucadia(now, Jeffries), fairholme, wintergreen even.  

 

Other than Berkshire, they have all significantly underperformed.

@bargainman my strategy has been to invest in Fairfax only when i am in agreement/aligned with the general positioning of their investment portfolio. As i have stated before, I like what they have been doing since about 2018 (in aggregate).

Edited December 28, 2023 by Viking

[Thrifty3000]

7 hours ago, Santayana said:

When did you first purchase Fairfax, and have you added to the position over time?

In roughly 2010 I did 2 internet searches that led to my initial investment in FFH. 

 

First, I googled the phrase “Warren Buffet of [insert country name]” for a number of countries like Canada, England, Australia, etc. That was probably the first time I learned about Prem Watsa - the “Warren Buffett of Canada.”

 

Second, I searched for “value investor message boards” which, of course, led me to COBF. 

 

Additionally, I remember reading one of the Berkshire annual meeting transcripts - around the time of the GFC - where Buffett had mentioned a Canadian insurer that almost perfectly timed the housing market crash with credit default swaps. I quickly learned it was FFH.

 

Somewhere around 2010, after learning Prem and Fairfax were approaching legendary investor status I bought a few thousand dollars worth of shares. Maybe $50k.

 

After following them for a decade, in 2020 I figured FFH was nearly certain to earn $28 to $35 per share. I really liked what I knew about Prem and the company, so when the shares hit $250 during the Covid crisis I bought 10 times more shares.
 

After 2020 I monitored the discussions on this board very closely, and thanks to @Viking and others I realized I was vastly underestimating FFH’s true earning power, so I continued doubling down until I had over a third of my net worth invested (at somewhere around $400 per share).

 

So far so good. I haven’t sold yet, since I still consider the shares undervalued, and since I’m still plenty happy with the management and culture.

[This2ShallPass]

On 12/27/2023 at 4:25 PM, benchmark said:

Did you mean to something like buying Jan 25 45 puts, for example? 

I prefer short on duration and strike closer to my buy. The premium for Jan 25 45 puts will be high and also downside will be greater than the upside which is only $7. So I pass. But I'm a noob in merge arb and it's not an active part of my strategy..

[bargainman]

Looking at my records I purchased FFH shares 2007-2013.

 

So basically during the time where they looked like geniuses for making a billion dollars by purchasing credit default swaps...  but then promptly lost that billion dollars by purchasing puts on the equity markets that had already dropped by fifty percent.  At the time when Buffett was making deals left and right.

 

Or at least that's how I remember it.

[Daphne]

First bought FFH in the mid 90s paying about $50 then bailed at $400 during the run up to $600 on feelings the company was about  to take a hit from being overextended on some problem purchases in US. It did crash and almost burn. We started buying back at $80.00 and our cost basis is now about $165.00. I have way too much of my net worth tied up in FFh but do sleep well at night. Thank you Prem!

[Xerxes]

Prem Watsa who !?

 

Never heard of Prem Watsa until I ran into bunch of Globe & Mail articles from 2014 and 2015. Invested an insignificant amount around the time Trump became president in 2016 but only went heavy in 2020-21. 
 

I even saved the articles from back in the day. Doesn’t say much but was enough to get me intrigued. And then I found this board, a year or before Covid and joined up later. 
 

 

[Viking]

Bangalore International Airport Limited (BIAL)

 

What is Fairfax’s 4th largest equity holding? At December 31, 2023, with a value of about $630 million, it looks to me like it is BIAL. BIAL is owned entirely within Fairfax India so it tends to get ignored as a core holding at the Fairfax (parent) level. But the fact it is ignored does not mean it does not exist.

 

For good reason, Prem calls BIAL the ‘crown jewel’ of Fairfax’s various equity holdings in India. BIAL is a very high quality asset - it is a trophy asset (very hard to secure a control position). It is well managed. And it looks exceptionally well positioned to benefit from the expected growth of the economy in India in the coming decades. So, in this post, let’s shine a light on this important holding to see what we can learn.

 

There are so many interesting layers to this story. What is missing? Is my logic faulty? 

 

Who is BIAL?

 

The best place to go to get information on BIAL is Fairfax India’s web site (start with the Q3 Interim Report and the 2022 Annual Report):

• https://www.fairfaxindia.ca

Here is how Fairfax India described BIAL in their Q3, 2023 Interim Report:

• “Bangalore International Airport Limited ("BIAL") is a private company located in Bengaluru, India. BIAL, under a concession agreement with the Government of India until the year 2068, has the exclusive rights to carry out the development, design, financing, construction, commissioning, maintenance, operation and management of the Kempegowda International Airport Bengaluru ("KIAB") through a public-private partnership. KIAB is the first greenfield airport in India built through a public-private partnership.” Fairfax India - Q3 Interim Report

KIAB (also know as BLR Airport) is the third largest airport in India and the largest airport in south India. Bangalore, the centre of India’s high-tech industry, is known as the ‘Silicon Valley of India’. KIAB was recently voted best domestic airport in India (go to the bottom of this post for a link to the article).

 

The History And Rise Of Bangalore International Airport

• https://simpleflying.com/bengaluru-airport-history/

A review of the fair value of the assets owned by Fairfax India

 

Fairfax India owns assets with a fair value at Sept 30, 2023 of $3.38 billion. In Q4, Fairfax India increased is ownership in BIAL by 7% (at a cost of $175 million) and sold down its position in IIFL Finance by 27%. Including these two recent transactions, BIAL represents about 47% of all assets in Fairfax India. BIAL is a massive holding for Fairfax India.

 

Fairfax owns 42.8% of Fairfax India. This puts the fair value of Fairfax’s stake in Fairfax India at about $1.45 billion.

 

 

What is the math that gets BIAL to a $631 million valuation for Fairfax?

 

As we mentioned earlier, Fairfax does not own BIAL directly - its position is held entirely through Fairfax India.

 

Estimating the total value of BIAL: At September 30, 2023, Fairfax India held an equity interest in BIAL of 57% with an estimated fair value of $1.408 billion. This values 100% of BIAL at $2.6 billion. In Q4, Fairfax India purchased another 7% BIAL from Siemens for $175 million; this transaction values 100% of BIAL at $2.5 billion. Given this is the most recent transaction, this is the number we will use to value Fairfax’s stake.

 

Estimating the fair value of Fairfax’s stake in BIAL: As of December 31, 2023, Fairfax India owned 59% of BIAL (on a fully-diluted equity basis). Fairfax owns about 42.8% of Fairfax India. Therefore, Fairfax owns about 25.25% of BIAL (59% x 42.8%), with a value of $631 million ($2.5 billion x 25.25%). This makes BIAL the 4th largest equity holding of Fairfax (after Eurobank, Poseidon and FFH-TRS).

 

 

From Fairfax India’s Q3 interim report:

• “At September 30, 2023 the company held a 57.0% equity interest in BIAL (December 31, 2022 - 54.0%) and its internal valuation model indicated that the fair value of the company's investment in BIAL was $1,408,403 (December 31, 2022 - $1,233,747).”
• “At September 30, 2023 the company held 43.6% out of its 57.0% (December 31, 2022 - 43.6% out of its 54.0%) equity interest in BIAL through Anchorage. As a result, the company's fully-diluted equity interest in BIAL was 52.0% (December 31, 2022 - 49.0%). Refer to note 8 (Total Equity, under the heading Non-controlling interests) for further discussion on Anchorage.”

How much did it cost Fairfax India to secure a 59% interest in BIAL?

 

Fairfax India made their first purchase in BIAL in 2016. Since then they have made 5 more purchases. Over the past 8 years, Fairfax India has spent a total of $902 million for 64% of BIAL.

 

In 2019, Fairfax India also sold a 5% interest to OMERS for $134 million. The sale was made via Anchorage (a subsidiary of Fairfax India).

 

Fairfax India’s fully-diluted equity position in BIAL (of 59%) cost a total of $768 million.

 

 

What has been the return on the 8-year investment in BIAL?

 

The fair value of Fairfax India’s 59% stake in BIAL is about $1.475 billion. Its cost is $768 million. The simple return is about $707 million. 

 

As reported by Fairfax India, the CAGR on this investment since inception has been 12.8% (to Sept 30, 2023).

 

 

 

What is the carrying value of Fairfax India at Fairfax?

 

This is where things get even more interesting.

 

At December 30, 2022, Fairfax had a carrying value for all of Fairfax India of $630 million (58.4 million shares x $10.78/share) - that is what is reflected in Fairfax’s book value. (Of interest, my math says the total cost to Fairfax since late 2015 of its various investments in Fairfax India has been about $535 million. So, carrying value for Fairfax India is slightly higher than Fairfax's cost basis? For an asset that has increased significantly in value of the past 8 years? That is something we will review in a future post.) 

 

Carrying value significantly understates the value of Fairfax's stake in Fairfax India today.

 

BIAL represents about 47% of Fairfax India. This gives us a ball-park estimate for the carrying value of BIAL at Fairfax today of about $300 million ($630 million x 47%).

 

Summary: Fairfax’s 25.25% interest in BIAL has a fair value of about $630 million and a carrying value of about $300 million. That is a significant difference. And as the value of BIAL grows in the coming years, that difference will likely grow even larger.

 

The very low carrying value of Fairfax India (including BIAL), is one good example of how the book value of Fairfax today is significantly understated.

 

Management

 

In 2017, Fairfax India paid up to get a controlling position in BIAL. They quickly overhauled management and installed Hari Marar as Managing Director and CEO. BIAL is exceptionally well managed. BIAL is a great example of the strong management team at Fairfax India. 

 

From Fairfax India’s 2017AR:

• “In July 2017 Fairfax India acquired the final 10% of BIAL owned by GVK for $200 million, the higher price being justified by this purchase enabling Fairfax India and the other remaining shareholders to reconstitute BIAL’s Board, to appoint the best qualified person as BIAL’s CEO, and generally to allow it to be managed according to Fairfax India’s standards of corporate governance and guiding principles.
• “Subsequently, three new directors with expertise in airport and airline management and finance were appointed to the Board of BIAL, and Hari Marar, the former COO of BIAL, was appointed as its new Managing Director and CEO.”

Since taking over in 2017, the management team at BIAL has done an exceptional job. See 'recent news' articles below for some current examples.

 

Conclusion

 

BIAL has been a solid investment for Fairfax India. Over the past 8 years, it has grown into the 4th largest equity holding of Fairfax. It has a carrying value that is less than half of its fair value.

 

BIAL is a very high quality asset. It is also exceptionally well managed. It is also perfectly positioned to benefit from India's growth in the coming years and decades. The runway for this investment is very long. 

 

Most importantly, Fairfax (via Fairfax India) has a control position in this very rare asset. That is almost priceless - and likely the reason Prem calls BIAL a ‘crown jewel’ asset for Fairfax.
 

—————

Recent news:

 

Dec 2023: Bengaluru airport to roll out its master plan with renovation of T1, new place for T3 by 2030

• https://indianexpress.com/article/cities/bangalore/bengaluru-airport-master-plan-renovation-9049746/#

Dec 2023: BLR Airport Secures ‘Best Domestic Airport’ Title

• https://www.bengaluruairport.com/corporate/media/news-press-releases/blr-airport-secures-best-domestic-airport-title-at-travel-leisure-india-s-best-awards-----

Dec2023: BLR Airport’s Terminal 2 earns UNESCO’s recognition as one of the 'World’s Most Beautiful Airports'

• https://www.bengaluruairport.com/corporate/media/news-press-releases/terminal---earns-unesco-s-recognition-as-one-of-the-world-s-most-beautiful-airports-and-

Dec 2023: Bengaluru airport most profitable in India in FY23

• https://www.moneycontrol.com/news/technology/bengaluru-airport-most-profitable-in-the-country-in-fy23-ahmedabad-incurs-highest-losses-11859721.html#

—————

Ownership structure of BIAL

 

 

Fairfax open to acquiring AAI’s 13% stake in Bangalore Airport: Hari Marar

• https://www.thehindubusinessline.com/economy/logistics/fairfax-open-to-acquiring-aais-13-stake-in-bangalore-airport-marar/article67466405.ece

—————

Prem’s Letter, Fairfax 2022AR:

• “While the book value per share of Fairfax India is $19.11 per share, we believe the underlying intrinsic value is much higher. Given the low market price for its shares, Fairfax India has taken the opportunity in the last four years to buy back 15.1 million shares for $194 million at an average price of $12.84 per share, including the three million shares it bought in 2022 for $36 million or an average price of $12 per share.”

—————

Fairfax India Q3, 2023 Interim Report: Details of BIAL and Anchorage Subsidiary

• “Non-controlling Interests: In 2019 the company formed Anchorage as a wholly-owned subsidiary of FIH Mauritius, intended to provide investment related services to support the company in investing in companies, businesses and opportunities in the airport and infrastructure sectors in India. On September 16, 2021 the company transferred a 43.6% equity interest in BIAL from FIH Mauritius to Anchorage and subsequently sold 11.5% (on a fully-diluted basis) of its interest in Anchorage to OMERS for gross proceeds of $129,221 (9.5 billion Indian rupees). Upon closing of the transaction, the company's ownership in BIAL was comprised of 10.4% held through FIH Mauritius and 43.6% held through Anchorage, representing effective ownership interest of 49.0% on a fully-diluted basis.
• “At September 30, 2023 the company continued to hold 43.6% out of its 57.0% (December 31, 2022 - 43.6% out of its 54.0%) equity interest in BIAL through Anchorage. As a result, the company's fully-diluted equity interest in BIAL was 52.0% (December 31, 2022 - 49.0%).”

—————

A history of financial transaction at BIAL

 

 

Timeline for BLR Airport

 

 

Edited December 31, 2023 by Viking