Fairfax stock positions

[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#

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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

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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

[SafetyinNumbers]

1 hour ago, Viking said:

 

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

 

The fair value of BIAL has increased 92% over the past 8 years (from inception), which is a CAGR of 8.5%. (Yes, this simple analysis understates Fairfax's actual return because not all of the investment was made at the beginning.)

 

 

 

Great analysis as usual Viking! Thank you!

FWIW, FIH calculates their CAGR to Sept 30, 2023 on BIAL to be 12.8%.

[Viking]

1 hour ago, SafetyinNumbers said:

Great analysis as usual Viking! Thank you!

FWIW, FIH calculates their CAGR to Sept 30, 2023 on BIAL to be 12.8%.

 

@SafetyinNumbers thanks for the input/help. I have edited my summary to include this. 

Edited December 31, 2023 by Viking

[petec]

On 12/31/2023 at 6:58 PM, Viking said:

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

 

Viking - thanks for working this through. I have been meaning to do it for ages!

 

This is one thing I wish FFH would change in their reporting - the reported difference between carrying and fair value for equities would be more useful if it included FIH on a look-through basis. By my rough maths this adds $20-25/share to FFH's "BV at fair value".

[petec]

On 12/29/2023 at 9:02 PM, bargainman said:

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.

 

You and me both. I then did a great job of adding every time markets went down and the stock spiked. Finally achieved some absolution by adding in size at the bottom of the covid selloff - first time I got it right and the only reason I feel good about how I managed the position 

 

The good thing is that my "hedge" via FFH put me in a psychological position to hold some great stocks 2010-2020, so actually I did OK despite having >25% in FFH at times. And then FFH took off like a rocket ship. Weird how things work out. 

[petec]

On 12/28/2023 at 2:45 PM, 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. 

 

 

 

Personally I think you are framing this wrong. Both FFH and BRK were built by investors who got into insurance for float. Insurance isn't a great business and neither of them has ever said it is. But done well, it can provide low cost funds for investing. Both companies are led by people with investing in their DNA who absolutely believe they can outperform the markets over time. 

 

I also find it amusing when people on investment boards, who are presumably there because they are interested in stockpicking and think it is worth doing, advise other people to index. Not a criticism, but always makes me smile.

[Viking]

5 hours ago, petec said:

 

Viking - thanks for working this through. I have been meaning to do it for ages!

 

This is one thing I wish FFH would change in their reporting - the reported difference between carrying and fair value for equities would be more useful if it included FIH on a look-through basis. By my rough maths this adds $20-25/share to FFH's "BV at fair value".

@petec as i was working through my BIAL post it became clear to me that i needed to do a valuation post on Fairfax India. It should be out this weekend.
 

Another layer of complexity with Fairfax India (and Recipe) is some shares are held in an ‘asset value note’ that was put on when Fairfax sold RiverStone Barbados a couple of years ago. Fairfax reports they ‘beneficially owned, and/or exercised control or direction over’ these shares so they should be included as shares Fairfax ‘owns’ today.  I think the shares being held in the ‘asset value note’ are slowly shrinking - hopefully this continues in Q4 (yes, Fairfax will need to spend some $ to buy the shares). 
 

The ‘asset value note’ looks to me like another example of Fairfax using leverage to boost returns. The FFH-TRS is another example. 
 

When i do my next size ranking of Fairfax’s equity holdings i am going to try and include the positions held in the ‘asset value note’ and Fairfax India at fair value (i will use Fairfax India’s reported book value). I might also take a stab at some private holdings like AGT and Bauer. This will increase the size of the equity bucket. And likely boost estimates of the returns from the equity bucket. 

Edited January 4 by Viking

[Jaygo]

5 hours ago, petec said:

 

Personally I think you are framing this wrong. Both FFH and BRK were built by investors who got into insurance for float. Insurance isn't a great business and neither of them has ever said it is. But done well, it can provide low cost funds for investing. Both companies are led by people with investing in their DNA who absolutely believe they can outperform the markets over time. 

 

I also find it amusing when people on investment boards, who are presumably there because they are interested in stockpicking and think it is worth doing, advise other people to index. Not a criticism, but always makes me smile.

 

I am in no way giving advice, it was a curiosity about the setup and logic. Prem and Warren have done well but as warren showed with his bet with the hedge funds that most do not beat the market. 

 

Another way of looking at it is if an insurance company with cheap float provides a leveraged investment return than even a market average will beat the market in a way. 

 

 

 

[Maverick47]

On 12/31/2023 at 1:01 PM, SafetyinNumbers said:

FWIW, FIH calculates their CAGR to Sept 30, 2023 on BIAL to be 12.8%.

Am I missing something in the FIH chart you included?  To me it seems to indicate a 12.0% CAGR for BIAL.  The 12.8% figure seems to apply to Seven Islands….

[SafetyinNumbers]

4 minutes ago, Maverick47 said:

Am I missing something in the FIH chart you included?  To me it seems to indicate a 12.0% CAGR for BIAL.  The 12.8% figure seems to apply to Seven Islands….

Either a typo by me or I misread it. Apologies for the confusion.

[MMM20]

3 hours ago, Jaygo said:

Another way of looking at it is if an insurance company with cheap float provides a leveraged investment return than even a market average will beat the market in a way. 

 

Tom Gayner has this figured out. Sounds like you want MKL.

[Viking]

Fairfax India was launched in 2015. It has grown into a wonderful business for Fairfax.

• Solid collection of assets.
• Very well managed.
• Very good track record.
• Well positioned for the future.

In this post we are going to get into the weeds of how Fairfax India is valued by its parent, Fairfax.
 

Let me know if you think i have messed up with my math/logic/assumptions… that is how we all learn. 

 

How much of Fairfax India does Fairfax own?

 

When Fairfax India was launched in 2015, Fairfax owned 28.1%. My math says Fairfax now owns 43.0% of Fairfax India, which is an increase of more than 50% over the past 8 years. Fairfax India is also now a much larger company - common shareholders equity has increased from $1 billion at inception in 2015, to $2.8 billion at Sept 30, 2023, which is an increase of 180%.  So today, Fairfax owns 50% more of a company that has increased in size by 180%.

 

That sounds great. But what does the math look like?

 

How many shares of Fairfax India does Fairfax actually own?

 

It can be a little confusing to understand exactly how many shares of Fairfax India that Fairfax actually owns. This is because some shares are held in an ‘asset value note’ that was put on when Fairfax sold RiverStone Barbados a couple of years ago.

 

On Feb 16, 2022, when they added to their position, Fairfax confirmed they ‘beneficially owned, and/or exercised control or direction over’ a total of 58.4 million shares of Fairfax India. I am assuming that is the number of shares they ‘own’ today.

 

 

A short history of the growth of Fairfax’s ownership of Fairfax India (total shares and %) can be found at the bottom of this post.

 

Market value and carrying value

 

What is the market value that Fairfax uses to value its stake in Fairfax India?

 

To determine market value, Fairfax uses Fairfax India’s stock price, which at Dec 31, 2023, was $15.20/share. This gives a total market value to Fairfax’s position of $888 million.

 

What is the carrying value that Fairfax uses to value its stake in Fairfax India?

 

Carrying value is important. This is the value that finds its way into book value. And, as we know, book value is the ‘holy grail’ use by investors to value P/C insurance companies.

 

In the 2022AR, Fairfax said the carrying value for their investment in Fairfax India was $10.78/share, or $630 million (using my share count of 58.4 million).

 

What is the excess of market value over carrying value?

 

It appears Fairfax’s book value is understating the market value of its stake in Fairfax India by about $250 million. (Yes, i know my dates are messed up… directionally, it appears Fairfax India’s carrying value at Fairfax is low).

 

 

OK. Are we done? No. There is a wrinkle.

 

Fairfax India’s stock price is a terrible measure to use to value Fairfax’s stake in Fairfax India. And that is because Fairfax India’s stock price trades at a severe discount to the fair value of the collection of companies that it owns.

 

My guess is accounting standards require Fairfax to report carrying value and market/fair value the way they do.

 

What should we do? Fairfax India has very good disclosures. We should simply use Fairfax India’s book value - that is the best measure of what the collection of assets they own are actually worth.

 

What is the value of Fairfax’s stake if we use Fairfax India’s book value?

 

Fairfax India has a book value of $20.89/share (at Sept 30, 2023), which puts the value of Fairfax’s stake at $1.22 billion (using my share count of 58.4 million). It appears Fairfax’s book value is understating the value of its stake in Fairfax India by about $590 million. That is much larger than our previous estimate of $250 million.

 

 

If we use a fair value of $1.22 billion, this suggests Fairfax India is Fairfax’s 4th largest holding, along with Eurobank, Poseidon and FFH-TRS. These 4 holdings represent about 40% of Fairfax’s total equity exposure.

 

What does Prem think about Fairfax India’s reported book value?

 

Prem thinks that Fairfax India’s intrinsic value is ‘much higher’ than its reported book value. If Prem is right, then the value of Fairfax’s stake in Fairfax India is worth even more than $1.22 billion.

 

Below are Prem’s comment from Fairfax’s 2022AR:

 

 

Growth prospects

 

Fairfax India reported a book value of $20.89/share at Sept 30, 2023. My guess is it will be well over $21 at Dec 30, 2023. Let’s assume Fairfax India grows BV/share at 10% in 2024, which would be $2.10/share.

 

This would put Fairfax’s share of growth in BV at $123 million ($2.10/share x 58.4 million shares). This would also deliver a (very rough) high teens ROE.

 

 

Is 10% growth in BV/share an aggressive assumption? No, I actually think it will prove to be conservative. Why?

• BIAL is now 47% of total investments at Fairfax India. Its value has gone sideways for the past 3 years - as a result of Covid. However, the airport is beginning its next significant growth phase (as second runway and recently completed Terminal 2 ramp up). An Anchorage IPO in 2024 could unlock significant value that has been building at BIAL.
• Two other private holdings in Fairfax India also might see IPO’s in 2024: NSE and SIS, which would likely unlock more value for Fairfax India.
• The remaining holdings of Fairfax India are well run companies and should continue to increase in value.

If my rough math is accurate, Fairfax’s stake in Fairfax India is poised to grow in value by about $123 million in 2024. Some of this value will show up in the ‘share of profit of associates’ bucket. However, like the past 8 years, a large part of the value will likely not show up in Fairfax’s reported results. As a result, the gap between fair value and carrying value will continue to widen.

 

Conclusion

 

Since being launched in 2015, Fairfax India has quietly been growing like a weed. It is a great example of exceptional long term value creation by the team  at Fairfax/Fairfax India/Fairbridge. However, the value creation has largely not been reflected/captured in Fairfax’s accounting results - especially book value.

 

Fairfax India is a great example of how book value at Fairfax is understated. There are likely more examples.

 

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Warren Buffett on book value

 

Warren Buffett in 2018 decided to no longer publish the book value for Berkshire Hathaway as he felt it was no longer a useful tool for investors to use to value Berkshire Hathaway’s share price. I wonder how much longer book value will serve as a useful tool for investors to value Fairfax’s share price.

 

“Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mis-mark that has grown in recent years.”

 

—————-

Fairfax India: Summary of ‘total existing Indian investments’

 

At Sept 30, 2023, Fairfax India held total investments with a fair value of $3.376 billion. If we adjust for Q4 transactions (increase in BIAL and decrease in IIFL Finance):

• BIAL (manages BLR Airport) = 47%
• All other holdings = 53%

 

Fairfax India

• Shareholders equity = $2.833 billion
• Debt = $500 million

—————-

A short history of Fairfax’s investment in Fairfax India

 

Fairfax India was launched in 2015. At inception, Fairfax invested a total of $300 million ($10/share) for a 28.1% ownership position. Fairfax India did a second capital raise in January 2017 (at $11.75/share) and Fairfax participated to keep its ownership position of similar size (it was 30.2% at the end of 2017. Fairfax has also received two performance fees in shares of Fairfax India (2018 and 2021). Today Fairfax owns 58.4 million shares of Fairfax India. My rough math says they paid a total of $539 million or an average of $9.23/share.

 

Share count at Fairfax India peaked at 152.9 million at December 31, 2018. Since that time, the share count has come down 11.2% to 135.7 million. With the stock trading well below book value, Fairfax India has been taking out shares on the cheap. Smart.

 

With Fairfax’s share count going up and Fairfax India’s share count coming down, Fairfax has increased its ownership interest in Fairfax India from 28.1% in late 2015 to 43.0 at Sept 30, 2023. That is an increase of more than 50% over the past 8 years. That is a meaningful increase.

 

 

—————

Summary of Fairfax India’s exceptional track record (at Sept 30, 2023)

• CAGR of ‘Total existing Indian Investments’ = 13.0%
• CAGR of ‘Total monetized Indian Investments’ = 17.5%

From Fairfax India's Q3 Interim Report - Page 32

- https://www.fairfaxindia.ca/wp-content/uploads/FIH-2023-Q3-Interim-Report-Final.pdf

 

—————

Summary of key metrics for Fairfax India (from 2022AR)

 

 

Edited January 5 by Viking

[petec]

On 1/4/2024 at 3:47 PM, Viking said:

@petec as i was working through my BIAL post it became clear to me that i needed to do a valuation post on Fairfax India. It should be out this weekend.
 

Another layer of complexity with Fairfax India (and Recipe) is some shares are held in an ‘asset value note’ that was put on when Fairfax sold RiverStone Barbados a couple of years ago. Fairfax reports they ‘beneficially owned, and/or exercised control or direction over’ these shares so they should be included as shares Fairfax ‘owns’ today.  I think the shares being held in the ‘asset value note’ are slowly shrinking - hopefully this continues in Q4 (yes, Fairfax will need to spend some $ to buy the shares). 
 

The ‘asset value note’ looks to me like another example of Fairfax using leverage to boost returns. The FFH-TRS is another example. 
 

When i do my next size ranking of Fairfax’s equity holdings i am going to try and include the positions held in the ‘asset value note’ and Fairfax India at fair value (i will use Fairfax India’s reported book value). I might also take a stab at some private holdings like AGT and Bauer. This will increase the size of the equity bucket. And likely boost estimates of the returns from the equity bucket. 

 

We should definitely include the asset value note shares. Doesn't that expire soon? I have a feeling they have to buy back those shares. 

 

Good luck valuing AGT and Bauer! I'll be fascinated to see your workings.

[Viking]

As of December 31, 2023, my guess is Fairfax has an investment portfolio that totals about $60 billion, with the split being roughly as follows:

 

 

In this post we review the holdings in the equities ‘bucket.’ To value a holding we normally used current ‘market value,’ which is the stock price at Dec 31, 2023, multiplied by the number of shares Fairfax owns. For private holdings we use Fairfax’s latest reported market value (sometimes carrying value). Derivative holdings, like the FFH-TRS, are included at their notional value. Where we have done something ‘funky’ we provide an explanation (see ‘additional notes’ below). We have attempted to capture a value for each holding that we feel roughly reflects its ‘intrinsic’ or actual economic value to Fairfax.

 

For Fairfax India and Recipe, some shares are held in an ‘asset value note’ that was put on when Fairfax sold RiverStone Barbados a couple of years ago. We used share counts that reflect what we think Fairfax actually owns/controls. (I think some Poseidon shares are also included in this note but I am not sure so I did not make an adjustment for this - so the Poseidon position below might be understated by about 9%).

 

Additional notes:

1. Atlas: $2,100 = 2,046 FV at Q3 + $50 Q4 earnings (likely low)
2. Fairfax India: $1,220 = $20.89 BV at FIH.U x 58.4 million shares
3. Recipe: $900 = ($17.25 CV at Dec 31, 2022 x 49.4 million shares) + $50 million (2023 earnings est)
4. AGT Food Ingredients: $350 million. A guess; probably low. EBITDA was C$150 million in 2022.
5. Mytilineos: includes exchangeable bonds
6. John Keells: includes convertible debentures

Ok, let’s get to the fun part of this post.

 

What are some key take-aways?

 

Below are mine. What are yours?

 

1.) Fairfax has a pretty concentrated portfolio

• The top 5 holdings make up 45% of the total
• The top 15 holdings make up close to 70% of the total

2.) Steady improvement in quality of the top 15 holdings over the past 6 years: What happened?

• New money has been invested at Fairfax very well (FFH-TRS, buying more of existing holdings)
• Some high quality businesses have continued to execute well (Fairfax India, Stelco)
• Some businesses, after years of effort, have turned around (Eurobank).
• Some businesses that were severely affected by Covid have emerged stronger (Thomas Cook India, BIAL, Recipe?)
• Some businesses were restructured/taken private (EXCO, AGT) and are now performing much better.
• Some low quality business were sold/merged/wound down (Resolute Forest Products, APR, Fairfax Africa).
• Some low quality businesses have shrunk in size due to poor results (BlackBerry, Farmers Edge, Boat Rocker).

The important point is the quality of Fairfax’s largest holdings have steadily been increasing. And this should result in higher overall returns from the equity portfolio in the coming years.

 

3.) What rate of return should this collection of equity holdings be able to deliver in 2024?

• 12% return x $18 billion = $2.16 billion (made up of share of profit of associates + dividends + ‘other’ consolidated non-insurance co’s + investment gains)
• This looks like a reasonable target for 2024, looking at the solid prospects/earnings profiles of the top 15 holdings (with a 70% weighting).

4.) A slow shift away from mark-to-market holdings. Today, less than 50% of the total portfolio is held in the mark-to-market bucket. Back in 2019, my guess is closer to 80% of the total portfolio was held in the mark-to-market bucket.

• This shift should have the effect of smoothing Fairfax’s reported results moving forward, especially during bear markets. As a reminder, in Q1, 2020, Fairfax had $1.1 billion in unrealized losses (when the equity portfolio was much smaller). As more holdings shift to the ‘Associates’ and ‘Consolidated’ buckets, it is the trend in underlying earnings at the individual holdings that will matter to Fairfax’s reported results and not a stock price - earnings are much more consistent than a stock price. Lower volatility in reported earnings should help Fairfax’s valuation (as volatility is considered bad by Mr. Market).
• This shift will also start to create a Berkshire Hathaway problem for Fairfax: over time book value will become an increasingly poor tool to use to value Fairfax. Why? The value of the ’Associates’ and ‘Consolidated’ companies captured in book value each year will fall short of the increase in their true economic value. Fairfax India is a good example of this today. Eurobank is a holding to watch moving forward.

Bottom line, Fairfax looks very well positioned today. But the story gets better: like the past 6 years, I expect the quality of Fairfax's equity holdings to continue to improve in 2024. That will improve future returns. And, like a virtuous circle, the growing cash flows will be re-invested growing the companies even more.

 

Thoughts? Am I missing something? What number below is most wrong? Why?

 

 

Edited January 6 by Viking

[Thrifty3000]

Thanks @Viking .  It looks to me like the top 5 holdings alone could generate look-through earnings in the ballpark of $1 billion. Since the top 5 holdings represent about half the equity portfolio, it seems like your $1.8 billion earnings estimate for the equity portfolio is perfectly reasonable.

 

Once again, thanks to your work, I’ll have to upwardly adjust my financial model. I have been underestimating the earning power of the equity portfolio. 

[SafetyinNumbers]

1 hour ago, Thrifty3000 said:

Thanks @Viking .  It looks to me like the top 5 holdings alone could generate look-through earnings in the ballpark of $1 billion. Since the top 5 holdings represent about half the equity portfolio, it seems like your $1.8 billion earnings estimate for the equity portfolio is perfectly reasonable.

 

Once again, thanks to your work, I’ll have to upwardly adjust my financial model. I have been underestimating the earning power of the equity portfolio. 

 

I think most investors including analysts are focused on the downside so they attribute little or no returns to the equity portfolio. Since the stock is so cheap there is no reason to include realistic estimates. It will be interesting if we see that change as they continue to beat estimates and if the stock begins to rerate.

 

The same might hold true for some of the equity holdings. No earnings growth is expected from Eurobank despite really strong momentum. They like Fairfax will have a lot of excess capital to reinvest after dividends. At 5x earnings analysts don't have a reason to be optimistic here either.

 

My theory is that both stocks will rerate faster once earnings estimates start going up because that's what quants focus on and most active capital is tied to quant screens in one way or another. For Fairfax, that can't' happen unless analysts start building in higher returns from the equity portfolio. Most won't bother until the market forces them to. Maybe that's starting to happen.

[Viking]

4 hours ago, Thrifty3000 said:

Thanks @Viking .  It looks to me like the top 5 holdings alone could generate look-through earnings in the ballpark of $1 billion. Since the top 5 holdings represent about half the equity portfolio, it seems like your $1.8 billion earnings estimate for the equity portfolio is perfectly reasonable.

 

Once again, thanks to your work, I’ll have to upwardly adjust my financial model. I have been underestimating the earning power of the equity portfolio. 

@thrifty For fun, here are some rough numbers for 2024:

• Poseidon = $200 to $250
• Eurobank = $400 to $450
• FFH-TRS = $400 to $500
• Fairfax India = $125
• Recipe = $75

Top 5 could deliver $1.2 billion in ‘value creation’ on their own. The FFH-TRS position is already up $120 million one week into the new year. If Eurobank announces the initiation of a dividend when they report YE results that likely will pop their share price. 
 

Of interest, much of the TRS notional position is not captured in BV (just the gains are captured in BV). So gains in that position really helps the ROE math.

Edited January 8 by Viking

[Haryana]

Newswire going verbose on negligible Orla, again!

Fairfax Announces Acquisition of Additional Orla Shares

TORONTO (Globe Newswire)

January 10, 2024

 

[srtadimeti]

https://m.economictimes.com/news/india/indias-big-advantage-is-that-two-thirds-of-the-economy-is-consumer-oriented-says-fairfax-boss-prem-watsa/articleshow/106711744.cms?_gl=1*1byev4h*_ga*MTIzOTEwODM4OS4xNjk3NjI3MjU2*_ga_WZ3Z4GGVRC*MTcwNDk2NzgyOS41LjEuMTcwNDk2ODAxMS42MC4wLjA.*_gcl_au*MTYyMDYzMDU3Ny4xNzAwNTgzMzI0
 

Fairfax to double investment in India over the next five years.

[nwoodman]

3 hours ago, srtadimeti said:

https://m.economictimes.com/news/india/indias-big-advantage-is-that-two-thirds-of-the-economy-is-consumer-oriented-says-fairfax-boss-prem-watsa/articleshow/106711744.cms?_gl=1*1byev4h*_ga*MTIzOTEwODM4OS4xNjk3NjI3MjU2*_ga_WZ3Z4GGVRC*MTcwNDk2NzgyOS41LjEuMTcwNDk2ODAxMS42MC4wLjA.*_gcl_au*MTYyMDYzMDU3Ny4xNzAwNTgzMzI0
 

Fairfax to double investment in India over the next five years.

I’ll take the $84 bn market cap right now if it’s in the offing , kind of thought that might be a story for 2030+.  However very pleasing to see that they have some other assets in mind other than, perhaps, a particular bank

[Haryana]

7 hours ago, nwoodman said:

I’ll take the $84 bn market cap right now if it’s in the offing , kind of thought that might be a story for 2030+.  However very pleasing to see that they have some other assets in mind other than, perhaps, a particular bank

Good catch on the $84 billion blunder even though cannot disagree that much if they are expressing their opinion of fair value in CAD$. Here is the link to more detailed interview -

https://economictimes.indiatimes.com/news/company/corporate-trends/indians-can-dream-now-the-potential-is-enormous-prem-watsa-chairman-fairfax-financial-holdings/articleshow/106716893.cms

 

[nwoodman]

MS just upgraded their PT for Eurobank from €2.01 to €2.33.  They had this to say:

 

‘We upgrade Eurobank to Overweight: The Greek banks are on the top of our order of preference within our CEEMEA Banks coverage, given the most attractive risk reward. Our PT for Eurobank moves up by ~16% following a 7% and 12% upgrade to 2024 and 2025 estimates on better NII, consolidation of Hellenic Bank acquisition in Cyprus in 2025. On our revised PT of EUR2.33 we have ~40% upside to the stock from current levels.”

 

and

 

“The Greek banks are expected to restate dividend payouts with FY23 results. With growing capital ratios into 2025, we see upside optionality from excess capital being returned to shareholders in higher dividend payouts, and/or higher earnings growth via deployment into asset growth. Eurobank is testament to this, with its planned Hellenic Bank acquisition. Our estimates now assume higher payouts of 35-50% for the Greek banks by 2025.
Our analysis suggests 140-520bps of excess capital over minimum management buffers by 2025 (620-940bps vs min regulatory requirement) for the Greek banks, with NBG standing out. We show below the potential upside of up to 9-38% to earnings from deployment of this excess capital over management buffers. We expect the reinstatement of dividends and return of capital to shareholders to be a key catalyst for the Greek banks in the coming months.”

 

Report attached for those interested

EEMEA_20240115_0001.PDF

[SafetyinNumbers]

4 hours ago, nwoodman said:

MS just upgraded their PT for Eurobank from €2.01 to €2.33.  They had this to say:

 

‘We upgrade Eurobank to Overweight: The Greek banks are on the top of our order of preference within our CEEMEA Banks coverage, given the most attractive risk reward. Our PT for Eurobank moves up by ~16% following a 7% and 12% upgrade to 2024 and 2025 estimates on better NII, consolidation of Hellenic Bank acquisition in Cyprus in 2025. On our revised PT of EUR2.33 we have ~40% upside to the stock from current levels.”

 

and

 

“The Greek banks are expected to restate dividend payouts with FY23 results. With growing capital ratios into 2025, we see upside optionality from excess capital being returned to shareholders in higher dividend payouts, and/or higher earnings growth via deployment into asset growth. Eurobank is testament to this, with its planned Hellenic Bank acquisition. Our estimates now assume higher payouts of 35-50% for the Greek banks by 2025.
Our analysis suggests 140-520bps of excess capital over minimum management buffers by 2025 (620-940bps vs min regulatory requirement) for the Greek banks, with NBG standing out. We show below the potential upside of up to 9-38% to earnings from deployment of this excess capital over management buffers. We expect the reinstatement of dividends and return of capital to shareholders to be a key catalyst for the Greek banks in the coming months.”

 

Report attached for those interested

EEMEA_20240115_0001.PDF 3.88 MB · 9 downloads

Thanks for sharing. The EUROB position is ~US$100/share so a significant chunk of the share price. Coincidentally, Fairfax’s share of EUROB’s expected dividend for 2024 is about US$5/share or the same amount as FFH’s dividend increase. European bank valuations are low so lots of room to rerate but hard to bet on. It might mean that earnings estimates are too low though as high returns are available for excess capital like the Hellenic Bank acquisition.

[Viking]

4 hours ago, nwoodman said:

MS just upgraded their PT for Eurobank from €2.01 to €2.33.  They had this to say:

 

‘We upgrade Eurobank to Overweight: The Greek banks are on the top of our order of preference within our CEEMEA Banks coverage, given the most attractive risk reward. Our PT for Eurobank moves up by ~16% following a 7% and 12% upgrade to 2024 and 2025 estimates on better NII, consolidation of Hellenic Bank acquisition in Cyprus in 2025. On our revised PT of EUR2.33 we have ~40% upside to the stock from current levels.”

 

and

 

“The Greek banks are expected to restate dividend payouts with FY23 results. With growing capital ratios into 2025, we see upside optionality from excess capital being returned to shareholders in higher dividend payouts, and/or higher earnings growth via deployment into asset growth. Eurobank is testament to this, with its planned Hellenic Bank acquisition. Our estimates now assume higher payouts of 35-50% for the Greek banks by 2025.
Our analysis suggests 140-520bps of excess capital over minimum management buffers by 2025 (620-940bps vs min regulatory requirement) for the Greek banks, with NBG standing out. We show below the potential upside of up to 9-38% to earnings from deployment of this excess capital over management buffers. We expect the reinstatement of dividends and return of capital to shareholders to be a key catalyst for the Greek banks in the coming months.”

 

Report attached for those interested

EEMEA_20240115_0001.PDF 3.88 MB · 8 downloads

@nwoodman thanks for all the info on Eurobank. It has been invaluable. 
 

MS new price target of €2.33/share is 45% higher than where shares closed 2023 (€1.61/share). Fairfax’s position in Eurobank was worth $2 billion at year end. 45% upside = $900 million gain. That is not on anyones radar right now (analysts who follow Fairfax). Eurobank is a monster-sized position for Fairfax - and it is poised to get much larger.
 

It really is amazing the turnaround that has happened at Eurobank over the past 3 years. It has been super interesting to watch the management team at Eurobank for the past 3 years - a steady stream of good decisions. The Hellenic Bank acquisition looks like it could be very good. And i can’t wait to see what the management team at Eurobank does in 2024.
 

To use an old hockey analogy: for years, out of necessity (an economic depression will do that), Eurobank was playing Chris Chelios defense (ugly, brutal). Now they have shifted to playing an Edmonton Oiler offense (I am taking about the Gretzky, Messier, Kurri, Coffee version). As a fan, I much prefer watching the ‘Oilers in their prime’ version. 

Edited January 15 by Viking

[nwoodman]

@SafetyinNumbers, @Viking  my pleasure and it still looks undervalued.  As always we take analysts with a grain of salt but I have enjoyed Nida Iqbal’s (MS Analyst) work over the last couple of years.  
 

It’s getting close to fruition that we bought a position in a bank, a shipping business, an airport plus an option on the fastest growing insurance sector with the ops and other positions throw in for free.  They were some pretty helpful conversations only a couple of years ago.
 

I find Fairfax, at times a little flighty, but their backing of Eurobank hopefully cries to the market patient and supportive capital.