Fairfax stock positions

[mcliu]

A large chunk of Fairfax’s equity holdings are being negatively impacted by the Coronavirus risk off environment: Eurobank, Seaspan, Emerging Markets equities (Fairfax India, Fairfax Africa, Thomas Cook India).

Coronavirus is looking increasingly contained.  Logarithmic scale shows the rate of increase is tailing off.

https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

 

At most, coronavirus could impact the 1st quarter of 2020 for just about any global business as a fraction of sales.  Will it really harm any business models?  Of course not.

 

Hopefully that's the case and not because of the definition change.

 

https://www.taiwannews.com.tw/en/news/3874490

"China changes counting scheme to lower Wuhan virus numbers"

China stops counting confirmed asymptomatic patients in Wuhan virus statistics

[Kaegi2011]

Anyone have any information on the company and/or the Oak Fund (what it owns)?

 

 

They're pretty secretive and they're probably the most under the radar PE firm out there.  And the model is fairly unique - they basically source deals from their own network of high net worth individuals who own businesses and promise to hold them for a long time.  Not forever, but also not flipping it three years down the road.  Very Buffettesque way of doing business (e.g., proprietary sourcing, stable capital, etc.) and it seems to be working.  Whether the deals are good or not I have no clue as they don't seem to be targeting institutional money (at least any that I could find), so no disclosure on performance at places like Calpers, etc. 

[Viking]

Anyone have any information on the company and/or the Oak Fund (what it owns)?

 

 

They're pretty secretive and they're probably the most under the radar PE firm out there.  And the model is fairly unique - they basically source deals from their own network of high net worth individuals who own businesses and promise to hold them for a long time.  Not forever, but also not flipping it three years down the road.  Very Buffettesque way of doing business (e.g., proprietary sourcing, stable capital, etc.) and it seems to be working.  Whether the deals are good or not I have no clue as they don't seem to be targeting institutional money (at least any that I could find), so no disclosure on performance at places like Calpers, etc.

 

Thanks for the info. BDT Capital looks like a quality operation which is nice to see especially given its large size in Fairfax’s equity portfolio. The position increased nicely in size from $355 at Dec 31, 2017 to $443 million at Dec 31,2018. No idea if they added capital to the position or if the increase was all gains. Hopefully they once again do the same disclosure (top equity positions) at the AGM this year.

[steph]

How far can the equity positions go down, before FFH is in danger?

[StubbleJumper]

How far can the equity positions go down, before FFH is in danger?

 

 

Your question might require a bit more explanation.  There are a number of potentially bad/dangerous outcomes of a collapse in equity prices:

 

1) Reduced underwriting capacity in the subs: if equities are held in the insurance subs, lower equity prices are marked to market and that increases the premiums:statutory capital ratio.  This would fall under the category of a "bad" outcome rather than dangerous.

 

2) Line of credit covenants: FFH holdco and several of the subs maintain lines of credit, some of which are partially drawn.  Each of those revolvers likely has a lengthy list of covenants.  The holdco covenants require a maximum debt:capital ratio and a minimum shareholders equity total.  My rough math suggests that FFH holdco could take about a $5b haircut on its equity before violating its covenants, but what are the other covenants that have not been disclosed?  What covenants are present in the subs' revolvers?  It would be highly inconvenient if the credit lines were pulled...this might be a "dangerous" outcome.

 

3) Bond/notes indentures: FFH and the subs have floated dozens of debt instruments, all of which have indentures.  Presumable these are far less restrictive than the credit line covenants?  Do falling equity prices constitute a risk?  This might be a "dangerous" outcome, but from the outside it's hard to estimate the risk.

 

4) Management fees: one of the ways that the holdco finances its operations is through management fees related to Fairfax India, Africa, and Hamblin Watsa's management of the subs' portfolios.  A smaller portfolio means smaller management fees, and perhaps a cashflow challenge for the holdco.  This would probably be a "bad" outcome but not dangerous.

 

5) Refinancing risk: either by good management or by good luck, FFH holdco doesn't have any bullet maturities during 2020.  However, holdco must continuously float new debt to replace maturing debt, with about US$300m needing to be refinanced by May 2021.  A collapse in the equity portfolio would not be helpful for credit availability or terms.  Similarly, if the need to issue shares arises, it is virtually certain that the price that FFH could obtain for a share issuance would be considerably lower after a collapse of the equity portfolio.  This is merely "bad" rather than dangerous.

 

 

 

At this point, I'd say that equity prices are not really a "danger" for FFH, but they do constitute yet one more trip to the woodshed for shareholders.

 

 

 

SJ

[Xerxes]

Not to pile on Prem W. as I respect the man.

 

But I would just note that in his annual letter he made a comment about high fliers tech companies and how expensive they are. Yet, the NASDAQ leadership “I.e FANGS” although down are no where near down as value is. 

[steph]

How far can the equity positions go down, before FFH is in danger?

 

 

Your question might require a bit more explanation.  There are a number of potentially bad/dangerous outcomes of a collapse in equity prices:

 

1) Reduced underwriting capacity in the subs: if equities are held in the insurance subs, lower equity prices are marked to market and that increases the premiums:statutory capital ratio.  This would fall under the category of a "bad" outcome rather than dangerous.

 

2) Line of credit covenants: FFH holdco and several of the subs maintain lines of credit, some of which are partially drawn.  Each of those revolvers likely has a lengthy list of covenants.  The holdco covenants require a maximum debt:capital ratio and a minimum shareholders equity total.  My rough math suggests that FFH holdco could take about a $5b haircut on its equity before violating its covenants, but what are the other covenants that have not been disclosed?  What covenants are present in the subs' revolvers?  It would be highly inconvenient if the credit lines were pulled...this might be a "dangerous" outcome.

 

3) Bond/notes indentures: FFH and the subs have floated dozens of debt instruments, all of which have indentures.  Presumable these are far less restrictive than the credit line covenants?  Do falling equity prices constitute a risk?  This might be a "dangerous" outcome, but from the outside it's hard to estimate the risk.

 

4) Management fees: one of the ways that the holdco finances its operations is through management fees related to Fairfax India, Africa, and Hamblin Watsa's management of the subs' portfolios.  A smaller portfolio means smaller management fees, and perhaps a cashflow challenge for the holdco.  This would probably be a "bad" outcome but not dangerous.

 

5) Refinancing risk: either by good management or by good luck, FFH holdco doesn't have any bullet maturities during 2020.  However, holdco must continuously float new debt to replace maturing debt, with about US$300m needing to be refinanced by May 2021.  A collapse in the equity portfolio would not be helpful for credit availability or terms.  Similarly, if the need to issue shares arises, it is virtually certain that the price that FFH could obtain for a share issuance would be considerably lower after a collapse of the equity portfolio.  This is merely "bad" rather than dangerous.

 

 

 

At this point, I'd say that equity prices are not really a "danger" for FFH, but they do constitute yet one more trip to the woodshed for shareholders.

 

 

 

SJ

 

 

Thank you for this very complete answer. Very interesting!

[petec]

The Eurobank 4q19 and 2020-22 business update makes for interesting reading. It is pre-COVID19 which will screw over 2020 but management does not expect it to change the long term outlook much. Bottom line is that the NPL restructuring is complete (only took a decade!) and growth is now the focus, partly in loans (loan/deposit ratio only 83% and deposits have been growing) but especially in fees and investment income.

 

They project 12c of EPS in 2020 and 16c in 2022. They have TBVPS at E1.44 in 2020 going to E1.70 in 2022. Adjust that however you want for COVID-19. Share price currently E0.41.

 

Greece is emerging from a depression with a pro-business government and Eurobank is heading towards making a 10% return on tangible equity. It is not unreasonable to think that it might trade on 10x earnings/1x TBVPS in a few years. If reaching E1.70 of TBVPS is delayed by a year by COVID-19, Fairfax's stake could be worth E2bn in 2023.

 

https://www.eurobankholdings.gr/-/media/holding/omilos/enimerosi-ependuton/enimerosi-metoxon-eurobank/oikonomika-apotelesmata-part-01/2020/fy-2019/4q2019-results-presentation.pdf

[petec]

I have been meaning to have a look at CIB for a while. I am a big fan of well-run EM banks, which often have high returns and spectacular growth potential. Here are my notes FWIW.

 

Genuinely impressive. Very focussed on governance. More awards than you can count. Simplest balance sheet ever. 53% of assets are in government bonds. 29% are in loans, split 78% corporate, 22% consumer/SME. Substantially all of the rest is cash and due from banks. Govt bonds attract a low capital weighting so RWA/A is 50%, but RWA/loans is 170%. CAR is 27%. Nearly all capital is equity. All equity is tangible. 94% of liabilities are deposits. The loan to deposit ratio is 43%. Assets/equity is 8x. NIM 6.3% and efficiency ratio 23%. NPLs are 5.3% and coverage is 190%. 10y ROE range 21%-33%; excluding a one off dip during the uprising, the range is 26%-33%. The Egyptian economy grows. Reforms started in 2006/7 and slowest growth since was 2% for three years after the uprising. Liberalisation continues. Inflation seems to average about 10% but spiked to 30% in 2017 before falling to 3% in late 2019. Potential for growth is huge. GDP per capita is $3,000 and 80% of GDP is private consumption. Bank lending/GDP is 34% and household debt/GDP is 7%. 80% of the adult population is unbanked. In a population of 100m there are only 16m debit cards and 3m credit cards. Mortgages barely exist. Two oddities: they seem to be the largest bank with 7% market share, and I can't understand how such a fragmented system is so profitable; and I can't see which currency the government bonds are in (they may have a portion in US treasuries backed by dollar deposits, or it may be all Egyptian pounds).

 

I think a good shorthand measure for long term dollar returns in EM bank stocks is ROE minus inflation, which suggests something in the high teens.

 

EDIT: I forgot to say that the CEO here, Hisham Ezz al-Arab, is on the Fairfax Africa board.

 

[Bryggen]

When would FFH new stock purchases be disclosed?

Thanks.

[Xerxes]

I checked on the net, Q4 was on Feb 14th

 

Using the same lead time, it ought to be around May 14th for Q1.

Or around there.

 

I think for BRK the F13 also is mid-May after the 03rd May AGM.

[petec]

Stelco did an interesting deal a couple of days ago for a) iron ore supply for 8 years and b) an option to buy a 25% take in a low cost iron ore mine at a price they describe as being well in the money based on their scenario analysis.

 

The deal presentation is worth a look for anyone interested.

 

Stelco may not be a great business, but I am inclined to agree with Prem that it is well managed. Capital allocation has been strong. And it will generate a lot of cash over the years (in bursts). The only thing I don't like about it is the employee liabilities. These are fixed, which is good, but they're understated on the balance sheet because they're discounted at a high rate. I can't make up my mind whether to capitalise this liability at the balance sheet value or the undiscounted value.

[Xerxes]

I had increased my FFH holding by 30% (share quantity wise) late in March.

Only to see the whole meltdown … again.

 

Further increased this morning by another 30% (share quantity wise).

 

In my case, it takes me years to build up a position, so I have the latitude to average up or average down.

Sadly, it has been average down for FFH case.

 

If it goes down another 20% in the coming weeks, you know who is getting irritated :)

[Bryggen]

I had increased my FFH holding by 30% (share quantity wise) late in March.

Only to see the whole meltdown … again.

 

Further increased this morning by another 30% (share quantity wise).

 

In my case, it takes me years to build up a position, so I have the latitude to average up or average down.

Sadly, it has been average down for FFH case.

 

If it goes down another 20% in the coming weeks, you know who is getting irritated :)

 

I am on the same boat and feel your pain and frustration ! Built my position over the last 3-4 years, so you already guessed that my average price is way above current level.... I could sell other stocks to purchase more FFH at those prices, but now I am like '' screw it''. Let's just handle this slide and, in the meantime, I keep repeating myself Prem's word '' It will come back'' ;)

 

What encourages me is the ''what appears to be new'' management approach on the investment side.

 

Let's see.

 

Cheers,

 

Bry

 

 

[Viking]

Dexterra aquisition by Horizon North Logisitcs; Fairfax to get 49% of new company (close expected in Q2)

 

I missed this announcement back in early March. Fairfax looks to be trimming down the number of small private investments that it holds. It recently sold APR Energy to Atlas/Seaspan in return for shares in Atlas. As more private investments migrate to publicly traded companies it does make it easier to follow and value the various businesses/equities that Fairfax holds. More importantly, it hopefully gets the holdings into a better situation to grow their business. That looks to be the case with APR and hopefully happens with this and future transactions.

 

From Fairfax's Q1 Report (page 51):

"On March 9, 2020 Horizon North Logistics Inc. ("Horizon North") entered into an agreement with Dexterra whereby Horizon North will legally acquire Dexterra by issuing common shares to the company representing an approximate 49% fully-diluted equity interest in Horizon North. Upon closing the company expects to obtain de facto control as the largest shareholder and will consolidate Horizon North. The transaction is anticipated to close in the second quarter of 2020, subject to approval by Horizon North shareholders and the satisfaction of customary closing conditions. Horizon North, based in the province of Alberta, is a publicly listed corporation providing a range of industrial services and modular construction solutions."

 

By way of background, Fairfax purchased Carillion Canada out of bankruptcy in March 2018 (at 5x free cash flow) and renamed Dexterra (not sure what the total purchase price was).

 

Market cap of Horizon North is $98 million, with shares trading at $0.59 (May 8). While Covid 19 is impacting the business of both companies greatly, the deal will happen under the terms announced March 9.

 

2019      Revenue  EBITDA                 

HN          $458      $31 (has debt)

Dexterra  $261      $17 (no debt)

 

- http://www.horizonnorth.ca/wp-content/uploads/2020/03/InvestorPresentation-2020-03-26.pdf

- http://www.horizonnorth.ca/investors/

- https://dexterra.com/about/

[petec]

The deal was worth $100m in HN shares when it was announced. Less now, and as you say we don’t know what was paid for Carillion so it’s hard to judge success. Also, at the time we were told Quess advised on the deal but didn’t have the cash to do it themselves, so it’s a bit odd they’ve now sold it to an entirely different operator.

 

Prem said (on the AGM call I think) that there is $1bn more to come in monetisations, which suggests to me they’re basically getting out of the entire private non-insurance portfolio.

[spin]

I would like to know more about the Digit investment.  I realize that they are probably years from profitability, but I would like to know how revenues are growing.

 

I guess I will have my chance to ask at the AGM.

 

Please feed back if you get an answer.

 

The CEO there has a very impressive background. As I have said elsewhere FFH does seem to be able to attract real talent to its projects.

 

Thanks for the thread.

 

Looks like an impressive start for Go Digit

 

https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo4097&flag=1

[petec]

One holding I think is very well positioned here is Kennedy Wilson. They have been net sellers for several years while growing institutional relationships, so they have significant investment capacity for the coming cycle. And they're trading at about 50% of conservatively-calculated SOTP value. I rather hope Fairfax buy more - in fact, it would be a great franchise to have in-house - but I doubt they will.

[Xerxes]

13F

https://fintel.io/i13f/fairfax-financial-holdings-ltd-can/2020-03-31-0

 

Not easy to read with the format. I see a minoooor position in Alphabet.

I don't see Exxon; must have been post-March.

Looks like at the AGM throwing in Alphabet and Exxon was more about "marketing".

 

Two things stand out: sold half of J&J and added more to Micron.

 

[Xerxes]

Here is a better link

https://www.holdingschannel.com/13f/fairfax-financial-holdings-ltd-can-top-holdings/

 

odd, there is -500 next to Blackberry !

[petec]

Some very odd looking outputs there. Might be worth going to the source.

 

The Blackberry thing might be something to do with the $500m convert but I can't imagine what.

 

The Seaspan numbers just look wrong. (EDIT - no they don't I misread them. Sorry.)

[petec]

Also - there are some known holdings missing, like Stelco, Eurobank. I don't spend a lot of time with 13F's. Does this include all the subsidiary holdings? Because if not it's basically useless.

[Xerxes]

Also - there are some known holdings missing, like Stelco, Eurobank. I don't spend a lot of time with 13F's. Does this include all the subsidiary holdings? Because if not it's basically useless.

 

Funny thing, off memory I don't ever recall seeing Recipe, Stelco or Eurobank on 13Fs prior to this one.

Though I could be wrong.

 

[petec]

Yeah - their holdings are scattered across multiple subs, and I have never found a single source that gives the whole picture. So they may well have bought more Google (for example) than this.

 

Then again I don't think the big news is in the equity portfolio. We already knew they were pretty much maxed out on equities and I think we can assume they're not going to sell any of the big positions here, so they are limited in what they can do and the impactful decisions will be on the bond side. So far we know they have redeployed or have plans to redeploy $5bn ($2.9bn into corporates, and $2bn into mortgages with Kennedy Wilson). That's where the news is, in my view. That and any sign of lasting deflation.

[Cigarbutt]

^They have a small arbitrage position in Tiffany & Co.

These arbitrage operations (small versus the size of their portfolios) have appeared for a very long time.

i wonder who is in charge of these investments and what kind of return they've achieved over the long term.