Fairfax stock positions

[Hoodlum]

9 hours ago, nwoodman said:

Eurobank Q3 transcript and MS analyst note attached.  All very positive especially the likely move to 50% payout.  The mix of divs /buyback  to be finalised early next year.  Some good color on the expected synergies with Hellenic.  This has to be worth more than tangible book (€2.27)!

 

Summary

 

Macroeconomic Context and Bank Growth

• CEO Fokion Karavias opened by noting strong regional economic performance in Cyprus (3.3% GDP growth), Greece (2.3%), and Bulgaria (2.1%). He remarked on Greece’s fiscal discipline, tourism’s boost to the economy, and an uptick in investment contributing to credit growth of 6.6% in 2024.

• Eurobank’s loan growth almost reached its annual target of €2.1 billion, with potential to hit €3.5 billion by year-end, driven by organic growth and the Hellenic Bank acquisition.

 

Hellenic Bank Acquisition and Synergies

• The acquisition of Hellenic Bank has expanded Eurobank’s assets, and the bank plans to leverage synergies amounting to €120 million, expected over three years (2025-2027), with a third realized in 2025.

• “The envelope of synergies of €120 million… will be fully deployed over a period of roughly three years.” - Fokion Karavias

 

Financial Performance

• Eurobank achieved €1.14 billion in net profit, with a return on tangible book value (RoTE) of 19% for the nine-month period.

• Karavias stated, “We may consider increasing the payout ratio from 40% previously up to 50% payable in 2025 of the 2024 profits,” with potential for both dividends and buybacks.

 

Strategic Plans and Challenges

• CFO Kokologiannis explained their approach to managing Deferred Tax Credits (DTC) by accelerating amortization, which would reduce DTC by 2033.

• They announced the intention to merge Eurobank Holdings and Eurobank S.A. to reduce administrative costs, a decision unrelated to DTC discussions with regulators.

 

Future Outlook and Loan Growth

• Karavias emphasized that, despite a projected slowdown in transactions in 2025, the bank expects solid loan demand due to a lower interest rate environment and ongoing Recovery and Resilience Facility (RRF) project disbursements, forecasting 7% growth in 2025.

 

Key Quotes

 

1. Macroeconomic Growth: “The positive economic sentiment is supported by a number of factors, including tourism, which had another strong year… and residential real estate prices remaining strong at 9.2% year-on-year growth.” - Fokion Karavias

2. Hellenic Bank Synergies: “We see an envelope of synergies of about €120 million… we should be able to realize at least one-third of this envelope [in 2025].” - Fokion Karavias

3. Dividend and Buyback Strategy: “We may consider increasing the payout ratio from 40% previously up to 50% payable in 2025 of the 2024 profits.” - Fokion Karavias

4. Deferred Tax Credits: “As of 2025, we will accelerate prudential amortization… DTC amortization is expected to accelerate materially and be eliminated circa eight years earlier than the current trajectory.” - Harris Kokologiannis

5. 2025 Loan Growth: “In 2024, we may achieve a credit growth of around 9%… in 2025, let’s say in the area of 7%, which is still a very solid number.” - Fokion Karavias

 

Demetra Specifically

 

1. Current Stake in Demetra: Eurobank recently acquired an 8.5% stake in Demetra, a holding company whose assets are predominantly in Hellenic Bank shares. This acquisition was part of a package deal with the Union of Bank Employees in Cyprus.

“Eurobank acquired the 8.5% of Demetra, that was a package deal with the Union of Bank employees in Cyprus.” - Fokion Karavias

 

2. Indirect Ownership in Hellenic Bank: This stake in Demetra gives Eurobank an additional indirect economic interest in Hellenic Bank. When calculated, it roughly adds 2% to Eurobank’s ownership in Hellenic Bank, supplementing its direct ownership, which will soon total 69% (56% current stake plus 13% additional shares subject to regulatory approval).

“The ticket for Demetra was around €32 million consideration… almost 2% on top of the 69% that we own directly.” - Fokion Karavias

 

3. Consideration for Further Stake: While Eurobank has not committed to further increasing its holdings in Demetra, the company noted that Demetra is an illiquid stock on the Cyprus Stock Exchange, which poses challenges for acquiring a significant additional stake in the open market.

“Whether we increase further our stake to Demetra or not, this is something that has not been considered yet. Take into account that Demetra is a very illiquid stock in the Cyprus Stock Exchange and through the market someone cannot really buy any material amount.” - Fokion Karavias

 

4. Strategic Value: Eurobank considers Demetra to act as a derivative of Hellenic Bank shares due to its significant holdings in Hellenic, thus enhancing Eurobank’s overall economic interest and control in Hellenic Bank.

“Demetra could be viewed as a derivative of Hellenic Bank shares.” - Fokion Karavias

EUROBANK_20241107_1846.pdf 235.38 kB · 6 downloads Eurobank Ergasias Services and Holdings S.A. (EGFEY) Q3 2024 Earnings….pdf 97.7 kB · 4 downloads

While not 100% clear which side required the 2% investment in Dementra, I think we will see some of the remaining 10% of shares involving smaller investors accept the tender offer next year at €4.58

 

 

[Viking]

15 hours ago, nwoodman said:

Eurobank Q3 transcript and MS analyst note attached.  All very positive especially the likely move to 50% payout.  The mix of divs /buyback  to be finalised early next year.  Some good color on the expected synergies with Hellenic.  This has to be worth more than tangible book (€2.27)!

 

Summary

 

Macroeconomic Context and Bank Growth

• CEO Fokion Karavias opened by noting strong regional economic performance in Cyprus (3.3% GDP growth), Greece (2.3%), and Bulgaria (2.1%). He remarked on Greece’s fiscal discipline, tourism’s boost to the economy, and an uptick in investment contributing to credit growth of 6.6% in 2024.

• Eurobank’s loan growth almost reached its annual target of €2.1 billion, with potential to hit €3.5 billion by year-end, driven by organic growth and the Hellenic Bank acquisition.

 

Hellenic Bank Acquisition and Synergies

• The acquisition of Hellenic Bank has expanded Eurobank’s assets, and the bank plans to leverage synergies amounting to €120 million, expected over three years (2025-2027), with a third realized in 2025.

• “The envelope of synergies of €120 million… will be fully deployed over a period of roughly three years.” - Fokion Karavias

 

Financial Performance

• Eurobank achieved €1.14 billion in net profit, with a return on tangible book value (RoTE) of 19% for the nine-month period.

• Karavias stated, “We may consider increasing the payout ratio from 40% previously up to 50% payable in 2025 of the 2024 profits,” with potential for both dividends and buybacks.

 

Strategic Plans and Challenges

• CFO Kokologiannis explained their approach to managing Deferred Tax Credits (DTC) by accelerating amortization, which would reduce DTC by 2033.

• They announced the intention to merge Eurobank Holdings and Eurobank S.A. to reduce administrative costs, a decision unrelated to DTC discussions with regulators.

 

Future Outlook and Loan Growth

• Karavias emphasized that, despite a projected slowdown in transactions in 2025, the bank expects solid loan demand due to a lower interest rate environment and ongoing Recovery and Resilience Facility (RRF) project disbursements, forecasting 7% growth in 2025.

 

Key Quotes

 

1. Macroeconomic Growth: “The positive economic sentiment is supported by a number of factors, including tourism, which had another strong year… and residential real estate prices remaining strong at 9.2% year-on-year growth.” - Fokion Karavias

2. Hellenic Bank Synergies: “We see an envelope of synergies of about €120 million… we should be able to realize at least one-third of this envelope [in 2025].” - Fokion Karavias

3. Dividend and Buyback Strategy: “We may consider increasing the payout ratio from 40% previously up to 50% payable in 2025 of the 2024 profits.” - Fokion Karavias

4. Deferred Tax Credits: “As of 2025, we will accelerate prudential amortization… DTC amortization is expected to accelerate materially and be eliminated circa eight years earlier than the current trajectory.” - Harris Kokologiannis

5. 2025 Loan Growth: “In 2024, we may achieve a credit growth of around 9%… in 2025, let’s say in the area of 7%, which is still a very solid number.” - Fokion Karavias

 

Demetra Specifically

 

1. Current Stake in Demetra: Eurobank recently acquired an 8.5% stake in Demetra, a holding company whose assets are predominantly in Hellenic Bank shares. This acquisition was part of a package deal with the Union of Bank Employees in Cyprus.

“Eurobank acquired the 8.5% of Demetra, that was a package deal with the Union of Bank employees in Cyprus.” - Fokion Karavias

 

2. Indirect Ownership in Hellenic Bank: This stake in Demetra gives Eurobank an additional indirect economic interest in Hellenic Bank. When calculated, it roughly adds 2% to Eurobank’s ownership in Hellenic Bank, supplementing its direct ownership, which will soon total 69% (56% current stake plus 13% additional shares subject to regulatory approval).

“The ticket for Demetra was around €32 million consideration… almost 2% on top of the 69% that we own directly.” - Fokion Karavias

 

3. Consideration for Further Stake: While Eurobank has not committed to further increasing its holdings in Demetra, the company noted that Demetra is an illiquid stock on the Cyprus Stock Exchange, which poses challenges for acquiring a significant additional stake in the open market.

“Whether we increase further our stake to Demetra or not, this is something that has not been considered yet. Take into account that Demetra is a very illiquid stock in the Cyprus Stock Exchange and through the market someone cannot really buy any material amount.” - Fokion Karavias

 

4. Strategic Value: Eurobank considers Demetra to act as a derivative of Hellenic Bank shares due to its significant holdings in Hellenic, thus enhancing Eurobank’s overall economic interest and control in Hellenic Bank.

“Demetra could be viewed as a derivative of Hellenic Bank shares.” - Fokion Karavias

EUROBANK_20241107_1846.pdf 235.38 kB · 9 downloads Eurobank Ergasias Services and Holdings S.A. (EGFEY) Q3 2024 Earnings….pdf 97.7 kB · 8 downloads

@nwoodman, thanks for the update and attaching the files. They were very helpful. The Eurobank story just keep getting better and better - the management team at this bank is exceptional. ROTE of +15% looks likely for the foreseeable future (management guide and they are conservative). It will be very interesting to see if they bump capital return to 50% and what the allocation is to buybacks. My guess is if they can buy back stock below (or close to) tangible book value they are going to buy as many shares as they can get (and rightly so). And their profit growth profile is so strong any shares they take out moving forward will look like a steal in another couple of years. Eurobank has so many irons in the fire… 

 

Eurobank is Fairfax’s largest equity holding. It is poised to grow and deliver exceptional returns in the coming years. Poseidon also looks like it should grow earnings nicely moving forward. The FFH-TRS should continue to increase in value. If we ever see that Anchorage IPO, Fairfax India should see a nice pop in value. Fairfax’s largest equity holdings look very well positioned. This suggests a 15% return on the equity portfolio is not only possible but perhaps likely.
 

PS: The fixed income portfolio currently has an average yield of 4.7%… The investment portfolio looks very well positioned.

Edited November 10, 2024 by Viking

[nwoodman]

3 hours ago, Viking said:

My guess is if they can buy back stock below (or close to) tangible book value they are going to buy as many shares as they can get (and rightly so). And their profit growth profile is so strong any shares they take out moving forward will look like a steal in another couple of years. Eurobank has so many irons in the fire… 

It always seemed a little strange that Eurobank opted for dividends vs 100% buyback at these prices.  I figured Fairfax must have preferred the cash, which may be indicative of their opportunity set . The mix moving forwards will be interesting and an amazing come back story nonetheless.

[nwoodman]

10 hours ago, Hoodlum said:

While not 100% clear which side required the 2% investment in Dementra, I think we will see some of the remaining 10% of shares involving smaller investors accept the tender offer next year at €4.58

 

 

I think there is a very high chance.  IIRC, there is a liquidity requirement for listing on the CSE, so you sell into the tender, or you have to make a market yourself.

 

"Additionally, the board highlighted the minimum dispersal criteria applicable in the case of the main market where the company is listed, as per Regulation 379/2014 of the Cyprus Securities and Exchange Commission, which requires “at least 25 per cent of the shares proposed for listing to be held by the wider public and by at least 300 natural or legal persons”.

 

https://cyprus-mail.com/2024/07/12/hellenic-bank-board-rejects-eurobanks-acquisition-offer-as-unfair/?t&utm_source=perplexity

[TwoCitiesCapital]

2 hours ago, nwoodman said:

It always seemed a little strange that Eurobank opted for dividends vs 100% buyback at these prices.  I figured Fairfax must have preferred the cash, which may be indicative of their opportunity set . The mix moving forwards will be interesting and an amazing come back story nonetheless.

 

That's pretty common with European companies 

[Viking]

Sleep Country: An Introduction

 

With the Sleep Country acquisition closing on October 1, 2024, it is time to do a high level review of this company to see what we can learn. 

 

Fairfax has been generating a record amount of net earnings and free cash flow in recent years. This is expected to continue. What is Fairfax doing with all the cash they are generating?

 

One of the major themes in recent years has been building out their collection of non-insurance private business holdings (reported in the ‘non-insurance consolidated companies’ bucket).

 

Are we in the early stages of a shift at Fairfax from pure P/C insurance company to a conglomerate model (like Berkshire Hathaway)? Perhaps. This is something to monitor moving forward.

—————

Fairfax closed its purchase of Sleep Country on October 1, 2024. Total purchase consideration was $880.6 million (C$1.2 billion).

 

The financing of the deal is interesting. Purchase consideration was made up of two components:

• Cash of $562.7 million, paid by Fairfax.
• Debt of  $317.9, which was assumed by Sleep Country after close (and is non-recourse to Fairfax).

A few things jump out with this transaction:

• Its size - At $880.6 million, it is a large purchase. After Seaspan/Atlas, this is Fairfax’s second largest equity investment made over the past 6 years.
• Type of transaction - It is a take private deal. Sleep Country was a publicly traded company (260th largest in size on TSX). Fairfax continues its aggressive build out its ‘non-insurance consolidated companies’ bucket of holdings.
• The use of leverage - Debt was used to fund 34% of the total purchase price.  Fairfax is not afraid to use a modest amount of leverage when making acquisitions.

We will dig into each of these things, and more, in the rest of this post.

 

What return does Fairfax target when making investments like Sleep Country?

 

Fairfax has a stated goal of earning 15% (pre-tax) per year on their equity investments. Importantly, they hope to achieve this return objective over the life of the holding - it is their long term goal.

 

With Sleep Country, a 15% (pre-tax) return equates to about:

• $562.7 million cash investment x 15% = $84.4 million (pre-tax) per year

Over the last couple of years, pre-tax net earnings at Sleep Country averaged about $80 million (C$110 million per year). Driven by Covid, Sleep Country over-earned in 2021 and 2022. However, due to a poor housing market and economy in Canada, Sleep Country likely under-earned in 2023 and especially YTD 2024.

 

Moving forward, interest expense at Sleep Country will be elevated due to the incremental $317.9 million in debt taken on. So my guess is Sleep Country will not hit Fairfax’s 15% return target over the next couple of years. However, Fairfax thinks long term when they make their investments. They obviously feel there is a good chance that over time, the management team at Sleep Country will be able to grow the business and deliver their targeted return.

 

What does Fairfax like about Sleep Country?

 

My guess is Fairfax likes:

• The senior management team.
• The size and stability of the earnings stream that Sleep Country is generating.
• The long term prospects of the business.

Fairfax bought a quality business for a fair price. Exactly the sort of thing that many investors have been hoping Fairfax would do more of. Welcome to ‘new Fairfax.’

 

For a good review of Sleep Country’s business, see the attached report from Fairway Research from April 2023.

• https://www.fairwayresearch.com/p/sleep-country-deep-dive-tsx-zzz

Fairfax has a long history of being invested in the mattress segment in Canada

 

Fairfax understands the mattress market in Canada very well. Back in 2004, Fairfax invested in the Brick, a large furniture retailed in Canada. In 2013, the Brick was merged with Leon’s creating the largest furniture retailer in Canada (Fairfax became a large shareholder in Leon’s). Mattress sales were one of the company’s core businesses. Fairfax sold its entire stake Leon’s in late 2021 (for C$25 per share) when the stock was trading at a Covid high.

 

Sleep Country is likely the best managed/performing large company in the furniture retailing market in Canada over the past 20 years. Sleep Country has likely been on Fairfax’s radar for many years.

 

Using debt to help finance acquisitions

 

Why use debt?

 

1.) To achieve the long term strategic goals of the company.

• To be opportunistic - strike when the opportunity presents itself.
• To make larger acquisitions.
• To make private/control acquisitions.

2.) To maximize value creation for shareholders.

• To improve the return profile of the acquisition.

 

Bottom line, debt is a tool in Fairfax’s capital allocation toolbox.

 

This strategy (having the acquired company take on debt to help fund the purchase) is similar to what private equity shops do with leveraged buyouts. Except in Fairfax’s case, the total amount of debt used is modest. And the debt gets paid down over time (I think).

 

With Sleep Country, 34%, or $317.9 million, of the total purchase price of $880.6 was financed with debt. Fairfax did a similar thing with the Recipe when it was taken private in 2022.

 

The plan will likely be for Sleep Country to use some of its free cash flow in the coming years to pay down some of the debt taken on to help finance the deal (I think this is what Recipe has done). It does not appear that Fairfax is looking to permanently lever up the balance sheets of the companies it purchases/takes private.

 

Strategic importance of the Sleep Country purchase

 

Fairfax has 5 income streams that drives its earnings. The first 4 are:

• Underwriting profit
• Interest and dividend income
• Share of profit of associates
• Investment gains

The 5th income stream is ‘non-insurance consolidated companies.’  This is the smallest income stream. But since 2022, Fairfax has been aggressively building out this collection of holdings:

• 2022: Recipe take private = $342 million
• 2022: Grivalia Hospitality = $195 million
• 2023: Meadow Foods (UK) = purchase price unknown
• 2024: Sleep Country = $880.6 million
• 2024: Peak Achievement = purchase price unknown (expected to close in Q4, 2024)

Wade Burton’s comments on Fairfax’s Q3-2024 conference call:

 

“Looking back over the last two years, we’ve made three significant long term equity investments, one in Meadow Dairy, a dominant milk ingredients company in the U.K. that is doing very well; another in Sleep Country, a dominant mattress distributor and retailer in Canada; and now a third, Peak, a dominant sporting goods company focused on hockey and lacrosse. All immediately are or will contribute to our earnings, and we believe all will continue to contribute more and more as their businesses progress.”

 

With the Sleep Country and Peak Achievement purchases, the size of the ‘non-insurance consolidated companies’ bucket of holdings has likely reached critical mass. The size of the earnings generated by this group of companies has now become a meaningful contributor to Fairfax’s total results. From a run rate today of about $150 million annually, earnings could increase to over $300 million annually as soon as 2025 or 2026. And it is poised to be Fairfax’s fastest growing income stream in the coming years.

 

Jen Allen’s comments on Fairfax’s Q3-2024 conference call:

 

“As Wade noted, with our recently announced Sleep Country and Peak Achievement transactions, we expect the operating income from our non- insurance companies reporting segment will grow in the future periods, reflecting the operating income diversity these investments will add to the segment.”

 

This 5th income stream provides Fairfax with many structural and strategic benefits:

• Earnings diversification: The earnings from this income stream are not correlated with the P/C insurance cycle.
• Liquidity: These holdings provide Fairfax with an important source of liquidity - holdings could be sold if Fairfax needed cash.
• Capital allocation benefits: Retained earnings from the various holdings can be re-invested into the best available opportunity within the Fairfax organization.

An important trend at Fairfax over the past 6 years with its equity portfolio has been a steady shift from public to private holdings. It will be interesting to see if this trend continues in the coming years.

 

The benefits of being a private company under the Fairfax umbrella

 

Being a publicly traded company has big disadvantages. The CEO must spend a great deal of their time with public relations / keeping Wall/Bay Street happy. And the business has to be run with a short term focus (like hitting the ‘expected’ quarterly number).

 

As a private company under the Fairfax umbrella, management can focus on running the business for the long term. And Fairfax is there to help with capital allocation.

 

Understanding value creation at Fairfax moving forward

 

There are problems with the ‘non-insurance consolidated companies’ bucket of holdings at Fairfax.

1. The information that is available to shareholders on these holdings is pretty limited. We usually only get a top line summary once per quarter. Often 2 or more companies are grouped together, making it even more difficult to understand what is going on under the hood (fundamentals etc).
2. This makes it quite difficult to understand the change in intrinsic value that is happening with each of the holdings, especially over a couple of years.

As this bucket of holdings increases in size and importance, the lack of information will likely start to create a Berkshire Hathaway type of problem for Fairfax: the economic value of the holdings will increase at a faster rate than the accounting value captured in book value. Over time, book value will become more understated / less relevant as a tool to use to value Fairfax.

 

However, there might be a silver lining for investors. Over time, Fairfax does tend to find creative ways to surface and recognize value that is hiding within its collection of businesses (in earnings and book value).

 

—————

 

Additional information on Sleep Country

 

From Fairfax’s Q3-2024 Interim Earnings Report

 

Acquisition of Sleep Country Canada Holdings Inc.

 

“On October 1, 2024 the company, through its insurance and reinsurance subsidiaries, acquired all of the issued and outstanding common shares of Sleep Country Canada Holdings Inc. ("Sleep Country") for purchase consideration of $880.6 (Cdn$1.2 billion) or Cdn$35.00 per common share. The total purchase consideration was comprised of cash of $562.7 (Cdn$759.9) and new non-recourse borrowings of $317.9 (Cdn$429.2) by a newly formed purchasing entity, which amalgamated with Sleep Country upon close. The company will commence consolidating Sleep Country in its Non-insurance companies reporting segment in the fourth quarter of 2024. Sleep Country is a specialty sleep retailer with a national retail store network and multiple e-commerce platforms.”

 

Sleep Country 2023AR

• https://filecache.investorroom.com/mr5ir_sleepcountry/345/SCCHI_AR_2023_vX_CMYK.pdf

 

Edited November 11, 2024 by Viking

[nwoodman]

7 hours ago, Viking said:

 

 

What does Fairfax like about Sleep Country?

 

My guess is Fairfax likes:

• The senior management team.
• The size and stability of the earnings stream that Sleep Country is generating.
• The long term prospects of the business.

 

 

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.

[SafetyinNumbers]

18 minutes ago, nwoodman said:

 

• 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.

 

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. 

[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 November 12, 2024 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.

[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 November 13, 2024 by Viking

[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 November 14, 2024 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 November 16, 2024 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. 

[Hoodlum]

Fairfax is involved in another Convertible Notes placement for Orla Mining, related to the acquisition of an Ontario gold mine.

 

https://www.newswire.ca/news-releases/orla-mining-announces-strategic-expansion-into-canada-with-acquisition-of-the-musselwhite-gold-mine-817471626.html

 

Quote

In connection with the Transaction, Orla has entered into a commitment letter with Fairfax, Pierre Lassonde, and Trinity Capital Partners Corporation for a non-brokered private placement of Convertible Notes in an aggregate principal amount of $200 million (the "Private Placement"). The Convertible Notes will have the following terms:

• Interest Rate: 4.5% per annum, payable in cash.
   
• Maturity: Five years from the date of issuance.
   
• Conversion Right: The Convertible Notes may be converted in full or in part at any time prior to the maturity date, by the holder thereof, into common shares (the "Shares") of Orla.
   
• Conversion Price: The initial conversion price for the Convertible Notes will be CAD$7.90 per Share (the "Conversion Price"). The Conversion Price represents a premium of 42% relative to closing price of Shares on Friday November 15, 2024 and will be subject to standard anti-dilution adjustments. 
   
• Redemption Right: After the 18-month anniversary of the issuance, the Company may redeem the Convertible Notes, provided that the 20-day volume weighted average price of the Shares is not less than 130% of the Conversion Price. Upon redemption, the Convertible Notes will convert into Shares at the Conversion Price.
   
• Warrants: On closing, each holder of the Convertible Notes will receive, for each Share issuable upon conversion thereof, 0.66 common share purchase warrants (the "Warrants") to acquire Shares. The Warrants shall have an exercise price of CAD$11.50 per Share and shall expire on the fifth anniversary of the closing of the Private Placement. 

 

[nwoodman]

Short video of Fokion Karavias discussing the fortunate problem of excess capital.  He reiterates comments from the Q3 results i.e. payout ratio raised to 50%. M&A is still on the cards but looking east (Middle East and India).   Also discusses  their plans to leverage their strong presence in Greece and Cyprus  to act as a gateway for corporates from the ME/I to the EU.

 

https://www.bloomberg.com/news/videos/2024-11-18/banks-in-greece-have-excess-capital-eurobank-ceo-says-video

[nwoodman]

Some coverage on the debt raise for Sleep Country

 

Sleep Country Canada Holdings Inc. is talking to investors about a potential Canadian-dollar bond sale to help finance its C$1.7 billion acquisition by Fairfax Financial Holdings Ltd. in what would be a rare leveraged buyout funded by loonie-denominated bonds, according to a person with knowledge of the matter.

The Canadian mattress retailer is holding a call for fixed-income investors on Wednesday, organized by National Bank Financial Markets and Scotia Capital, Bloomberg reported earlier. The company is expected to receive at least one credit rating that's below investment grade, according to the person, who asked not to be identified discussing private matters.

 

 

https://www.bloomberg.com/news/articles/2024-11-19/sleep-country-mulls-potential-bond-sale-in-rare-leveraged-buyout?srnd=phx-markets

Edited November 20, 2024 by nwoodman

[Hoodlum]

AGT announced the sale of their rail assets to GCMG, while signing a 20 year agreement to continue using this rail system.  There are no details of the sale value, but GCMG will need to report it at the time it closes in the next couple of months. 
 

I wonder what AGT has planned for this, unless they will distribute a special dividend to Fairfax. 

 

https://www.globenewswire.com/news-release/2024/11/20/2984466/0/en/AGT-Food-and-Ingredients-Inc-Announces-Sale-of-Shortline-Rail-and-Bulk-Handling-Infrastructure-Partnership-with-GCM-Grosvenor-and-Mobil-Grain-Ltd.html

 

This sale returns significant capital to AGT, which presently generates over $3 billion in revenue annually. We will continue building on the strength of our partnership with Fairfax Financial Holdings Ltd. in creating a global agriculture growth story, including expanding our global packaged foods business.
 

The transaction is subject to regulatory approvals and customary closing conditions and is expected to close in late 2024 or early 2025.

[Viking]

3 hours ago, Hoodlum said:

AGT announced the sale of their rail assets to GCMG, while signing a 20 year agreement to continue using this rail system.  There are no details of the sale value, but GCMG will need to report it at the time it closes in the next couple of months. 
 

I wonder what AGT has planned for this, unless they will distribute a special dividend to Fairfax. 

 

https://www.globenewswire.com/news-release/2024/11/20/2984466/0/en/AGT-Food-and-Ingredients-Inc-Announces-Sale-of-Shortline-Rail-and-Bulk-Handling-Infrastructure-Partnership-with-GCM-Grosvenor-and-Mobil-Grain-Ltd.html

 

This sale returns significant capital to AGT, which presently generates over $3 billion in revenue annually. We will continue building on the strength of our partnership with Fairfax Financial Holdings Ltd. in creating a global agriculture growth story, including expanding our global packaged foods business.
 

The transaction is subject to regulatory approvals and customary closing conditions and is expected to close in late 2024 or early 2025.

 

@Hoodlum , thanks for posting the link. This is the part that really got my attention "This sale returns significant capital to AGT." 

 

Fairfax took AGT private in 2018. The total company back then was valued at C$436 million. AGT is a large company.

 

Over the years, we have received very little new information on what has been happening at this company - and what its value is today. 

 

It makes sense that Fairfax does want to get paid for its significant investment in AGT. Perhaps we see a nice dividend get to sent to Fairfax when this deal closes.

-----------

Welcome to 'new Fairfax'. 6 years ago many of the equity holdings were burning cash (at the Fairfax level) and the time of Fairfax's senior management team. 6 years later, after much creativity and effort, Fairfax's equity portfolio has been fixed. New equity purchases since 2018 have been very good (like Stelco). The old portfolio of holdings (from pre-2018) has been completely cleaned up. There will always be a few sub-performers in any equity portfolio - these types of holdings are now de-minimus for Fairfax. This is very bullish for future returns at Fairfax from its equity portfolio (future returns should be much better than past returns).

 

AGT is an example of a legacy company (pre-2018) that Fairfax decided to keep. It will be interesting to learn more about the transaction announced yesterday. After 6 years of ownership, it is likely a good time for Fairfax (and its shareholders) to start to get paid.

 

When you look at Fairfax's current stable of equity holdings... the 'surprises' we are getting are mostly skewed in one direction - we are getting 'good' surprises. Like I said, welcome to 'new Fairfax.' 

Edited November 20, 2024 by Viking

[Hoodlum]

51 minutes ago, Viking said:

 

@Hoodlum , thanks for posting the link. This is the part that really got my attention "This sale returns significant capital to AGT." 

 

Fairfax took AGT private in 2018. The total company back then was valued at C$436 million. AGT is a large company.

 

Over the years, we have received very little new information on what has been happening at this company - and what its value is today. 

 

It makes sense that Fairfax does want to get paid for its significant investment in AGT. Perhaps we see a nice dividend get to sent to Fairfax when this deal closes.

-----------

Welcome to 'new Fairfax'. 6 years ago many of the equity holdings were burning cash (at the Fairfax level) and the time of Fairfax's senior management team. 6 years later, after much creativity and effort, Fairfax's equity portfolio has been fixed. New equity purchases since 2018 have been very good (like Stelco). The old portfolio of holdings (from pre-2018) has been completely cleaned up. There will always be a few sub-performers in any equity portfolio - these types of holdings are now de-minimus for Fairfax. This is very bullish for future returns at Fairfax from its equity portfolio (future returns should be much better than past returns).

 

AGT is an example of a legacy company (pre-2018) that Fairfax decided to keep. It will be interesting to learn more about the transaction announced yesterday. After 6 years of ownership, it is likely a good time for Fairfax (and its shareholders) to start to get paid.

 

When you look at Fairfax's current stable of equity holdings... the 'surprises' we are getting are mostly skewed in one direction - we are getting 'good' surprises. Like I said, welcome to 'new Fairfax.' 

 

yes, I also noticed the comment regarding AGT having over $3B in revenue.  It will be interesting to see what the return on this sale is and what they do with it.