Fairfax stock positions

[Viking]

40 minutes ago, nwoodman said:

Good post.  I was a little bit ho-hum on this one in terms of economics but quite excited about the management that it brings with it.  Fairfax has a checkered history with retail but you never know when they might come across their Andy Barnard of retail.  Not saying it is the Sleep Country management by any means, but your can hope.

 

“Sleep Country Canada has been guided by a team of experienced leaders since its inception in 1994. Here’s an overview of key management figures and their tenures:

• Christine Magee: Co-founded Sleep Country in 1994 and served as President. She transitioned to Chair of the Board, a position she continues to hold.

• Stephen K. Gunn: Also a co-founder in 1994, Gunn has been integral to the company’s strategic direction. He has served as Executive Co-Chairman and remains actively involved.

• Gordon Lownds: The third co-founder, Lownds played a significant role in the company’s early development. He retired from active management in the early 2000s.

• David Friesema: Joined Sleep Country in 1995 and held various leadership roles, culminating in his appointment as CEO in 2014. Friesema announced his retirement in 2021, with his tenure concluding at the end of that year.

• Stewart Schaefer: Founded Dormez-vous in 1994, which merged with Sleep Country in 2006. He served as Chief Business Development Officer before being appointed President in April 2021. Schaefer became CEO on January 1, 2022, and continues to lead the company.

 

The acquisition of Sleep Country by Fairfax Financial Holdings in October 2024 brings this seasoned management team into Fairfax’s portfolio. This integration not only adds leadership expertise but also provides access to Sleep Country’s established retail systems, including a national network of over 300 stores and multiple e-commerce platforms. This infrastructure aligns with Fairfax’s strategy to enhance its retail operations and customer engagement across its diverse holdings.”

 

People and systems, get this right and the Sleep Country purchase could be accretive across their wider retail portfolio.

@nwoodman, that is great insight. I hope Fairfax is following Buffett’s model and only buying companies where the management team wants to stick around and continue to run the business. The senior team at Sleep Country is very good. That can only help Fairfax’s other large Canadian holdings, like Recipe. The team at Peak Achievement also looks pretty good - they have executed a pretty solid turnaround over the past 6 years.

[Viking]

31 minutes ago, SafetyinNumbers said:

My sense with Fairfax is that they will stick with management until management is ready to sell. I assume Stewart is the reason they did this deal and when he’s ready to sell, FFH will also exit just like STLC. For ZZZ and presumably Peak Achievement, buying at a fair price, adding some leverage, stripping cash not needed for reinvestment and exiting at a great price. 

@SafetyinNumbers, this is an interesting take. Makes sense. Fairfax is a total return investor. If they get an opportunity to sell/monetize an asset at an attractive price they probably will. This is one area where they differ from Buffett/BRK. I like Fairfax’s approach (for them).

Edited Tuesday at 02:21 AM by Viking

[SafetyinNumbers]

27 minutes ago, Viking said:

@SafetyinNumbers, this is an interesting take. Makes sense. Fairfax is a total return investor. If they get an opportunity to sell/monetize an asset at an attractive price they probably will. This is one area where they differ from Buffett/BRK. I like Fairfax’s approach (for them).

I think the risk also goes up when management changes and ultimately they are generalists so it’s sensible to sell at the same time.

[nwoodman]

fooling around with some valuations for Eurobank.  Nida Iqbar at Ms has a valuation of €2.63.  Seems a bit on the conservative side to me but decent margin of safety at these prices.  

 

1. Gordon Growth Model (GGM)

Key Assumptions:
- Current TBV: €2.27
- Sustainable RoTE: 15% (management's target)
- CoE: 10.5% (RFR 3.5% + Beta 1.1 x ERP 6.5%)
- Long-term growth: 2.5%

Calculation:
TBV * (RoTE - g)/(CoE - g) = €2.27 * (15% - 2.5%)/(10.5% - 2.5%) = €3.18

2. Sum-of-Parts (Geographic segments)
Region | Earnings | Multiple | Value
Greece: €647m x 8.5 P/E = €5,500m
Bulgaria: €154m x 9.0 P/E = €1,386m  
Cyprus Combined: €335m x 10.0 P/E = €3,350m
Other: €70m x 8.0 P/E = €560m

Total Equity Value: €10,796m
Shares Outstanding: 3.7bn
Per Share: €2.92

 

3. Justified P/TBV Multiple
Components:
- Target RoTE: 15%
- CoE: 10.5%
- Growth: 2.5%
- Payout ratio: 50%

Justified P/TBV = (RoTE - g)/(CoE - g) * Payout = 1.35x
Applied to 2025E TBV of €2.45 = €3.31

4. Dividend Discount Model (DDM)
Assumptions:
2024E DPS: €0.29 (50% of €0.58 EPS)
2025E DPS: €0.31
2026E DPS: €0.33
Terminal growth: 2.5%
CoE: 10.5%

DDM Value: €3.05

 

5. Market-Based Approach
Peer Group Metrics:
- Average P/TBV: 0.9x
- Average P/E: 7.5x
- Premium justified for Eurobank: 20% (better RoTE, asset quality)

Applied to:
2024E EPS of €0.58 * (7.5x * 1.2) = €5.22
Current TBV €2.27 * (0.9x * 1.2) = €2.45

Average: €3.84

 

Final Blended Price Target: €3.10

 

Weightings:
- GGM: 25% (€3.18 * 0.25)
- SOTP: 25% (€2.92 * 0.25)  
- Justified P/TBV: 20% (€3.31 * 0.20)
- DDM: 15% (€3.05 * 0.15)
- Market-Based: 15% (€3.84 * 0.15)

 

Key Upside Drivers:
1. Hellenic Bank synergies (€120m by 2027)
2. RRF-driven loan growth
3. Cost of risk normalization
4. Higher dividend payout potential
5. Geographic diversification benefits

 

Key Risks:
1. Interest rate environment
2. Greek macro risks
3. Integration execution risk
4. Competition in core markets
5. Regulatory changes

 

The €3.10 price target implies 56% upside from current price of €1.99, justified by:
- Sustainable RoTE above cost of equity
- Strong capital position
- Geographic diversification
- Clear strategic direction
- Asset quality improvement
- Dividend growth potential

 

Models to one side, Fokian Karavias and co seem like pretty savvy operators.  It will be interesting to see if they can sniff out some more acquisitions.

[Haryana]

@Viking thanks for your post on Sleep Country, was good to learn a few more things from it.

 

Have 2 questions:

 

1. You wrote "Fairfax has a stated goal of earning 15% (pre-tax) per year on their equity investments."

Is that right? I understand their goal of earning 15% on equity but they can achieve that with the equity investments earning even just half or a third of that. 

 

2. You mentioned "Liquidity" as strategic/structural benefit because they can sell it when required. However, a private company that is large in size and subject to adverse cycles and markets could be the one of the most illiquids of options?

[Viking]

8 hours ago, Haryana said:

@Viking thanks for your post on Sleep Country, was good to learn a few more things from it.

 

Have 2 questions:

 

1. You wrote "Fairfax has a stated goal of earning 15% (pre-tax) per year on their equity investments."

Is that right? I understand their goal of earning 15% on equity but they can achieve that with the equity investments earning even just half or a third of that. 

 

2. You mentioned "Liquidity" as strategic/structural benefit because they can sell it when required. However, a private company that is large in size and subject to adverse cycles and markets could be the one of the most illiquids of options?

@Haryana , I think Fairfax has stated in the past that they expect their equity investments to earn 15% per year. I am assuming they mean pre-tax. And i think that generally is their targeted return when making new equity investments, although it is probably not meant to be a straight jacket for the team at Hamblin Watsa. So there are probably exceptions. 
 

Prem was asked at the AGM in 2023 if Fairfax carried too much debt/had too much leverage. He said no. One of the reasons he gave is he said they have assets they could sell if they needed to raise cash (should the need arise). I think one of the reasons they like the non-insurance consolidated holdings is they are firmly in control of what happens to those assets moving forward.

 

Edited Wednesday at 04:36 PM by Viking

[Haryana]

1. You wrote "Fairfax has a stated goal of earning 15% (pre-tax) per year on their equity investments."

5 hours ago, Viking said:

 , I think Fairfax has stated in the past that they expect their equity investments to earn 15% per year. I am assuming they mean pre-tax. And i think that generally is their targeted return when making new equity investments, although it is probably not meant to be a straight jacket for the team at Hamblin Watsa. So there are probably exceptions.

Right, I like to make this clarification/distinction between their expectation on equity investments and their objective on common equity. First of all, an equity investment (consolidated non-insurance operation) is different from common equity (book value).

In 2023 letter we see, as in 2021 and 2020 letters as well, details on both of them:

"We expect each of these non-insurance operations to generate a 15% annual return or better over the long term." and "The company considers book value per basic share a key performance measure as one of the company’s stated objectives is to build long term shareholder value by compounding book value per basic share by 15% annually over the long term. This measure is calculated by the company as common shareholders’ equity divided by the number of common shares effectively outstanding."

2. You mentioned "Liquidity" as strategic/structural benefit because they can sell it when required. However, a private company that is large in size and subject to adverse cycles and markets could be the one of the most illiquids of options?

5 hours ago, Viking said:

Prem was asked at the AGM in 2023 if Fairfax carried too much debt/had too much leverage. He said no. One of the reasons he gave is he said they have assets they could sell if they needed to raise cash (should the need arise). I think one of the reasons they like the non-insurance consolidated holdings is they are firmly in control of what happens to those assets moving forward.

Rather than being a "Liquidity" advantage, could it be an "Optionality" advantage?

[gfp]

pre-13F look at the trading inside Odyssey Re in the quarter - no moves of any size

 

this was from last night, but looks like the 13F came out today -

https://www.dataroma.com/m/holdings.php?m=FFH

 

23680.2024.P.Q3.P.O.3.4833355.pdf

Edited Thursday at 03:53 PM by gfp

[backtothebeach]

Sold VOO, BEN, BABA and META.

Bought UAA and KHC.
 

 

[Hoodlum]

Power Corp's financial report from this week has the details on the Peak acquisition.  Fairfax owned a similar 43% ownership to Sagard's 42.6%.  The $325m sale to Fairfax would suggest a $195m reporting gain in Q4 over the $129m carrying value at Fairfax (this also matches the gain reported by Power Corp).  I presume that Fairfax also received the $60m distribution from Peak in Q3 and I wonder who owns the other ~15% of Bauer. 

 

So, between the Stelco sale ($366m gain) and Peak acquisition we are looking at a reporting gain of >$550m in Q4, which will likely completely offset the Hurricane Milton losses.  Let me know if my calculations are off.

 

https://www.powercorporation.com/media/uploads/reports/quarter/bpcc-2024-q3-eng-web-final.pdf

 

Sagard held a 42.6% equity interest and a 50% voting interest in Peak at September 30, 2024 (same as at December 31, 2023). Peak designs, develops and commercializes sports equipment and apparel for ice hockey and lacrosse under iconic brands including Bauer. The Corporation’s investment is accounted for using the equity method.

 

During the second quarter of 2024, Peak disposed of its minority interest in Rawlings Sporting Goods Company Inc. (Rawlings), a leading brand in baseball. In July 2024, Sagard received a distribution of US$60 million from Peak.

 

On September 30, 2024, Peak announced that Fairfax will acquire Sagard’s 42.6% interest in Peak. On close of the transaction, the Corporation expects proceeds of approximately US$325 million, and to recognize a gain in net earnings of approximately US$195 million. The transaction is expected to close in the fourth quarter of 2024, subject to customary closing conditions.

Edited yesterday at 08:06 PM by Hoodlum

[SafetyinNumbers]

2 hours ago, Hoodlum said:

Power Corp's financial report from this week has the details on the Bauer acquisition.  Fairfax owned a similar 43% ownership to Sagard's 42.6%.  The $325m sale to Fairfax would suggest a $195m reporting gain in Q4 over the $129m carrying value at Fairfax (this also matches the gain reported by Power Corp), but this gain could be slightly greater for Fairfax as the existing Peak carrying value includes other businesses.  I presume that Fairfax also received the $60m distribution from Peak in Q3 and I wonder who owns the other ~15% of Bauer. 

 

So, between the Stelco sale ($366m gain) and Bauer acquisition we are looking at a reporting gain of >$550m in Q4, which will likely completely offset the Hurricane Milton losses.  Let me know if my calculations are off.

 

https://www.powercorporation.com/media/uploads/reports/quarter/bpcc-2024-q3-eng-web-final.pdf

 

Sagard held a 42.6% equity interest and a 50% voting interest in Peak at September 30, 2024 (same as at December 31, 2023). Peak designs, develops and commercializes sports equipment and apparel for ice hockey and lacrosse under iconic brands including Bauer. The Corporation’s investment is accounted for using the equity method.

 

During the second quarter of 2024, Peak disposed of its minority interest in Rawlings Sporting Goods Company Inc. (Rawlings), a leading brand in baseball. In July 2024, Sagard received a distribution of US$60 million from Peak.

 

On September 30, 2024, Peak announced that Fairfax will acquire Sagard’s 42.6% interest in Peak. On close of the transaction, the Corporation expects proceeds of approximately US$325 million, and to recognize a gain in net earnings of approximately US$195 million. The transaction is expected to close in the fourth quarter of 2024, subject to customary closing conditions.

Nice find @Hoodlum, thanks for sharing. 
 

I assume the other 15% is owned by management. 

[SafetyinNumbers]

7 minutes ago, Hoodlum said:

Thanks. That makes sense regarding the management ownership. I have also updated my comments, removing references to Bauer as this was a Peak acquisition.  This acquisition places a value of $650m on Fairfax’s 85% ownership of Peak.  I can see this becoming another $1B business for Fairfax in the not too distant future. Meanwhile, this is just another footnote, that most investors are not aware of. 
 

I decided go back and look at the Peak investment in Rawlings, since most of the Peak discussion has revolved around Bauer.  Rawlings was purchased by Seidler Equity Partners for $400m in 2018.  Peak then merged Easton into Rawlings with Seidler Equity in 2020, receiving $60m in cash and a 28% equity in Rawlings. 
 

So what would the Rawlings portion of Peak be worth today. We have seen from CCM and Bauer, that Sports equipment investments have grown quite well over the last few years.  That $400m initial value for Rawlings has grown substantially since then, especially when you account for the additional size increase from the merger with Easton. Rawlings has since acquired additional baseball equipment companies since then and moved to a new Campus in 2022. 
 

It is difficult to determine a value for Rawlings since they are privately owned, but I could see a valuation in access of $1B based on what we now.  That would suggest Peak’s 28% interest in Rawlings being valued at over $300m.  
 

I believe that Peak is still undervalued at $650m based on what we can ascertain. 
 

 

As you pointed out in the first post, didn’t Peak sell its stake in Rawlings and then payout a special dividend? 

[Hoodlum]

10 minutes ago, SafetyinNumbers said:

As you pointed out in the first post, didn’t Peak sell its stake in Rawlings and then payout a special dividend? 

I had not realized that dividend was related to a sale. I will delete this latest post to avoid confusion with others.  That does seem like a very low valuation for Rawlings.