Fairfax stock positions

[Crip1]

50 minutes ago, Viking said:

One step closer to being able to (finally) close the book on this perpetual money-losing holding. It would be interesting to know what the benefits are to Fairfax of taking it private.

Part of the benefit would presumably be not having to talk about the share price any more. It's now "out of sight, out of mind" so if it does go fully belly up, it's a non issue. If, by the grace of God, somehow it starts making money, it could be sold eventually not unlike the Pet Insurance business. Improbable, but not impossible. 

 

-Crip

[Viking]

1 hour ago, Crip1 said:

Part of the benefit would presumably be not having to talk about the share price any more. It's now "out of sight, out of mind" so if it does go fully belly up, it's a non issue. If, by the grace of God, somehow it starts making money, it could be sold eventually not unlike the Pet Insurance business. Improbable, but not impossible. 

 

-Crip

 

I think in the past @glider3834 has pointed out that there may be some tax loss benefits as well. But i am not an accountant so can’t speak to those sorts of things. 

Edited March 20, 2024 by Viking

[petec]

9 hours ago, nwoodman said:

1. The airport is the biggest and potentially undervalued asset on the FIH books.  It has to figure prominently in any capital raise for a cash purchase of IDBI but I don’t think they want to sell it completely.  
 

2. Yes OMERS is what I was referring to but they will need a substantial contribution from FFH.  Thats assuming there isn’t a “pet insurance” business lurking on the FIH balance sheet.  Warrants/Prefs makes good sense rather than equity.

 

IDBI seems to moving in the right direction from a profitability perspective but non Performing Assets were a big problem for them until recently. GNPA peaked at 28% in 2018 and is now around 4-5%. Roughly like a current Eurobank vs the 2015 version that saw NPLs peak  at 45%.

 

I am more intrigued than concerned as to how they pull it together.  Their timing was pretty good with Bank of Ireland but they were definitely early with Eurobank.  Given these experiences I am hoping their “rat sniffing” is finely tuned these days, especially in the context of banks.
 

 

I find it highly unlikely that FIH would sell a crown jewel asset like BIAL to buy a struggling bank.

 

It would also distort FIH to the point of absurdity.

 

This is too big. It's a FFH+OMERS deal IMHO, with FIH participation. Could be wrong.

 

BTW I don't *think* they have ever committed to doing *everything* in India through FIH. Correct me if I am wrong.

[nwoodman]

1 hour ago, petec said:

 

I find it highly unlikely that FIH would sell a crown jewel asset like BIAL to buy a struggling bank.

 

It would also distort FIH to the point of absurdity.

 

This is too big. It's a FFH+OMERS deal IMHO, with FIH participation. Could be wrong.

 

BTW I don't *think* they have ever committed to doing *everything* in India through FIH. Correct me if I am wrong.

1. Agree about selling BIAL but it doesn’t mean you can’t use it as part of a financing deal and still maintain control.

2.  I think we are already seeing that hypothesis play out.

3.  Digit is the obvious answer to that last point.

 

I think this years AGM is shaping up to be a cracker.  I will be following it as best I can from the trek to Mera Peak in Nepal.  Have fun y’all

[TwoCitiesCapital]

11 hours ago, petec said:

 

I find it highly unlikely that FIH would sell a crown jewel asset like BIAL to buy a struggling bank.

 

It would also distort FIH to the point of absurdity.

 

This is too big. It's a FFH+OMERS deal IMHO, with FIH participation. Could be wrong.

 

BTW I don't *think* they have ever committed to doing *everything* in India through FIH. Correct me if I am wrong.

 

I believe the commitment was every new, non-insurance indian investment would be done via FIH to prevent a conflict of interest in determining which shareholders get access to which deals. 

 

If FIH and FFH are both contributing proportionately due to a deal being too big for FIH, I wouldn't be upset because it doesn't upset the apple cart of favoring one group over another. 

 

If it's structured where FFH gets the bill and FIH a token amount, I think you'll see problems. 

Edited March 20, 2024 by TwoCitiesCapital

[petec]

9 hours ago, nwoodman said:

Agree about selling BIAL but it doesn’t mean you can’t use it as part of a financing deal and still maintain control.

 

I think BIAL is the *last* asset they'd sell, because it does seem clearly undervalued.

 

9 hours ago, nwoodman said:

Digit is the obvious answer to that last point.

 

No - Digit is an insurance company. They'll always be done by FFH. FIH is meant to do everything else.- I am pretty sure they laid this out on a call a year or two back. So Digit is not a proof-point, actually.

 

I'm guessing a combination of FIH equity, plus OMERS, plus FFH lending to FIH (either straight debt or pref+warrant, but the warrant would have to be designed not to f*** over FIH minorities).

 

Potentially a nice way to deploy a few billion of the fixed income portfolio at a decent spread backed by the entire FIH portfolio.

 

 

[petec]

4 minutes ago, TwoCitiesCapital said:

I believe the commitment was every new, non-insurance indian investment

 

Yes. I am sure this is how it is meant to work.

 

[Xerxes]

12 hours ago, petec said:

 

I find it highly unlikely that FIH would sell a crown jewel asset like BIAL to buy a struggling bank.

 

It would also distort FIH to the point of absurdity.

 

This is too big. It's a FFH+OMERS deal IMHO, with FIH participation. Could be wrong.

 

BTW I don't *think* they have ever committed to doing *everything* in India through FIH. Correct me if I am wrong.

In 2018 AGM they contrasted FIH to a ship sailing independently on a discovery mission. That ship is far enough from the mainland (FFH) such that it does not cause collateral damage. 
 

Based on that I think a large bank would not go on FFH balance sheet. Unless the view above is changed. I also realize that FIH doesn’t have the firepower. 

Edited March 20, 2024 by Xerxes

[SafetyinNumbers]

44 minutes ago, Xerxes said:

In 2018 AGM they contrasted FIH to a ship sailing independently on a discovery mission. That ship is far enough from the mainland (FFH) such that it does not cause collateral damage. 
 

Based on that I think a large bank would not go on FFH balance sheet. Unless the view above is changed. I also realize that FIH doesn’t have the firepower. 

I think they could create a sidecar structure. Other asset managers use it when a particular idea or opportunity is too big for the main fund. In FIH’s case, they could contribute the CSB stake and $300m in cash or abour ~$700m in value depending on the CSB mark. The rest of the funds could be contributed by FFH and other large investors like OMERS etc… With this structure, FIH, could earn a management fee on the outside investors share of the sidecar. 
 

It makes no sense to dilute FIH equity to fund this deal or to sell a crown jewel like BIAL so I don’t think they will do that. The sidecar is a sensible solution and FIH would still have ~$5/share of exposure to banking but they might have better ideas.

[nwoodman]

1 hour ago, petec said:

 

I think BIAL is the *last* asset they'd sell, because it does seem clearly undervalued.

 

 

No - Digit is an insurance company. They'll always be done by FFH. FIH is meant to do everything else.- I am pretty sure they laid this out on a call a year or two back. So Digit is not a proof-point, actually.

 

 

I was actually referring to Digit’s float.  While relatively small, surely the appeal of an Indian P&C and Life insurer is investing in domestic assets.  I have often wondered how the investment ideas get split once Digit is large enough.  One of those nice problems to have as long as you are invested in the Parent.

[ValueMaven]

Micron up 15% in AH trading 

[Hoodlum]

32 minutes ago, ValueMaven said:

Micron up 15% in AH trading 

Someone needs to ask Prem at the AGM about Micron as an AI play. 

Edited March 20, 2024 by Hoodlum

[nwoodman]

42 minutes ago, ValueMaven said:

Micron up 15% in AH trading 

They blew thru estimates, impressive
 

Micron Q2 24 Earnings Results:
- Adj EPS: +$0.42 (est -$0.27)
- Adj Revenue: $5.82B (est $5.32B)
- Cash Flow From Ops: $1.22B (est $2.14B)
- Adj Op. Income: $504M (est -$238.4M)
- Sees Q3 Adj Revenue Between $6.4B - $6.8B (est $5.99B)

 

19 minutes ago, Hoodlum said:

Someone needs to ask Prem at the AGM about Micron as an AI play. 

“No technology investment for me!"

 

 

 

[netcash1]

as of the last filing period how much MU did Fairfax own?

[nwoodman]

13 minutes ago, netcash1 said:

as of the last filing period how much MU did Fairfax own?

This seems reasonably accurate

 

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

 

 

[glider3834]

58 minutes ago, nwoodman said:

This seems reasonably accurate

 

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

 

 

looks like they put most of their position on Q3'22 , Q1'23 https://www.dataroma.com/m/m_activity.php?m=FFH&typ=b 

 

not sure their avg cost but Micron was trading in a band from low 50s to low 60s - so if we assume high 50s cost & their position in MU unchanged since Q4'23, would be 2x based on AH pricing

 

 

Edited March 20, 2024 by glider3834

[nwoodman]

1 hour ago, glider3834 said:

looks like they put most of their position on Q3'22 , Q1'23 https://www.dataroma.com/m/m_activity.php?m=FFH&typ=b 

 

not sure their avg cost but Micron was trading in a band from low 50s to low 60s - so if we assume high 50s cost & their position in MU unchanged since Q4'23, would be 2x based on AH pricing

 

 

Thanks @glider3834.  Nice to see a bit of instant gratification come their way.  MU’s forward guidance was strong too.  This may be another $500+m position in the making.

Edited March 21, 2024 by nwoodman

[Xerxes]

https://www.dataroma.com/m/m_activity.php?m=FFH&typ=b 

 

I love that one single share of BRK.A that they have like forever in their portfolio. Like a single piece of artwork just hanging on the wall. 

 

I guess they want some exposure to Prem Watsa of Omaha, just in case

[dartmonkey]

15 hours ago, glider3834 said:

looks like they put most of their position on Q3'22 , Q1'23 https://www.dataroma.com/m/m_activity.php?m=FFH&typ=b 

 

not sure their avg cost but Micron was trading in a band from low 50s to low 60s - so if we assume high 50s cost & their position in MU unchanged since Q4'23, would be 2x based on AH pricing

 

Blackberry 46.725m shares, trading at $2.74, so it's a $128m position

Micron 3.912m shares, trading at $111.85, so it's a $438m position

 

Fairfax got all it's money back on its $500m in convertible shares, plus $200m in interest, roughly a 4% annual return in an era of low interest rates, so that is not so bad. But the huge loss on the common ($802m now worth $128m) has to be Watsa's worst ever investment, with a $674m loss. At least this quick $220m gain on the Micron position takes some of the sting out of the BB losses. 

 

Still, I would love to see that Blackberry line gone from the Dataroma list, especially since many investors think that these $1.5b in US and Canadian public company holdings accurately represents their $6.9b in total mark to market public equity or their $16.5b in total public equity, or their $92b in total assets. The unfortunate $128m Blackberry position stills looks like a big deal given that it is almost 10% of that $1.5b, but looking at it as  context of the $92b in assets, it is only 0.14%, and is fading out of relevance. 

 

But the easiest way for that appearance to be corrected would be to just sell the stake and be done with it. Hopefully, now that the convertibles have been sold, Chen is gone and Watsa has left the board, that is something they may do soon.

[gfp]

5 minutes ago, dartmonkey said:

Still, I would love to see that Blackberry line gone from the Dataroma list, especially since many investors think that these $1.5b in US and Canadian public company holdings accurately represents their $6.9b in total mark to market public equity or their $16.5b in total public equity, or their $92b in total assets. The unfortunate $128m Blackberry position stills looks like a big deal given that it is almost 10% of that $1.5b, but looking at it as  context of the $92b in assets, it is only 0.14%, and is fading out of relevance. 

 

But the easiest way for that appearance to be corrected would be to just sell the stake and be done with it. Hopefully, now that the convertibles have been sold, Chen is gone and Watsa has left the board, that is something they may do soon.

 

Any misconception that helps the stock trade cheaply is a help, not a hindrance.  I hope for many misconceptions like "blackberry is material to fairfax" in my investments.

[dartmonkey]

21 minutes ago, gfp said:

 

Any misconception that helps the stock trade cheaply is a help, not a hindrance.  I hope for many misconceptions like "blackberry is material to fairfax" in my investments.

 

Yes, you have a point - although I myself am unlikely to add to my hugely oversized Fairfax position, the company is still repurchasing shares so I suppose we should rejoice in these misconceptions. And along the same line of thinking, there is no reason for us to wish for Fairfax to be included in the TSX 30, either. We get more shares repurchased for the same number of dollars, the longer the share price languishes. 

[Thrifty3000]

7 minutes ago, dartmonkey said:

 

Yes, you have a point - although I myself am unlikely to add to my hugely oversized Fairfax position, the company is still repurchasing shares so I suppose we should rejoice in these misconceptions. And along the same line of thinking, there is no reason for us to wish for Fairfax to be included in the TSX 30, either. We get more shares repurchased for the same number of dollars, the longer the share price languishes. 

 

I want the shares to triple overnight so I can exit and fly private the rest of my life.

[nwoodman]

Cross post to a summary etc of Micron's CC.  MS upgrade to $98/share.  Est EPS $6.84 '25, $8.33 '26.  

[Viking]

Operating Income of Non-insurance Consolidated Companies

 

Over the past couple of years Fairfax has been materially increasing the size of its non-insurance consolidated holdings. Revenue and ‘normalized’ earnings have been moving higher. However, the improving results over the past 2 years has been masked by large temporary or one-time write-downs/losses - so most investors are not aware of the many positive changes that have been happening under the hood. My guess is the earnings power for this group of holdings will begin to shine through fully in 2024. In the coming years, this bucket is poised to become a much more important income stream for Fairfax - in terms of size and consistency.

 

Let’s begin by getting some context.

 

The big picture

 

Fairfax has a very large equity portfolio – as of March 8, it has a total value of about $19 billion (including the FFH-TRS position at its current notional value of $2 billion). From an accounting perspective, equity holdings can be grouped into one of three buckets – based on how much of the company Fairfax owns and how much control it exerts.

 

In this post we are going to review the equity holdings that fall into the ‘Consolidated’ bucket. These are the holdings where Fairfax owns more than 50% (or has more than 50% voting control) and therefore has a control position.

 

The common stock ‘Consolidated’ holdings have a total value of about $2.8 billion, which is about 15% of Fairfax’s total common stock portfolio. I don’t think holdings like AGT Food and Ingredients and Sporting Life are included in the $2.8 billion. Bottom line, the group of ‘Consolidated’ holdings likely has a market value of well over $3 billion.

 

 

From an accounting perspective, the results of ‘Consolidated’ holdings are captured on the Consolidated Statements of Earnings in the ‘Non-insurance revenue’ and the ‘Non-insurance expenses’ line items.

 

What holdings are captured in this bucket?

 

Below is a list of all the companies - with a brief description of their primary business - that are included in the ‘Consolidated’ bucket.

 

 

Non-insurance companies

 

This reporting segment is comprised as follows:

• Restaurants and retail – Comprised principally of Recipe, Golf Town, Sporting Life and Toys “R” Us Canada (deconsolidated on August 19, 2021).
• Fairfax India – Comprised of Fairfax India and its subsidiaries, which are principally NCML and Privi (deconsolidated on April 29, 2021).
• Thomas Cook India – Comprised of Thomas Cook India and its subsidiary Sterling Resorts.
• Other – Comprised primarily of AGT, Dexterra Group, Boat Rocker, Farmers Edge, Grivalia Hospitality (consolidated July 5, 2022), Pethealth (deconsolidated on October 31, 2022) and Mosaic Capital (deconsolidated on August 5, 2021).

How much of each holding does Fairfax own? And what is the value?

 

The information below is from page 15 of Fairfax’s 2023AR and captures what they call the ‘common stock holdings’. My guess is their list does not capture a couple of important holdings: AGT Food and Ingredients, Sporting Life and possibly Meadow Foods. We were given the carrying value for Sporting Life in a different section so I have added that. However, we were not given a carrying value for AGT or Meadow and I have not bothered to guess. So the total for both carrying value and market value in the chart below are likely understated by quite a bit.

 

Interestingly, the excess of market value to carrying value for this collection of holdings is about $373 million. This number is also likely understated by quite a bit.

 

 

What do the financials look like for this group of holdings?

 

Over the past three years, revenue has increased 39% to $6.6 billion. However, pre-tax income has been low and stagnant, averaging about $60 million over the past three years.

 

 

Below is the split by reporting segment.

 

 

Notes:

• Pre-tax income (loss) before interest expense; excludes interest and dividends, share of profit (loss) of associates and net gains (losses) on investments.
• The majority of Fairfax India’s earnings fall into the ‘Share of Profit of Associates’ bucket.

 

What is driving the significant top line growth?

• Improving fundamentals: Companies in this bucket of holdings were significantly impacted by Covid, which was a significant drag on results from 2020 to 2022. Recipe (full serve, dine-in restaurants), Thomas Cook India (travel) and Dexterra (facilities management). Results from these these companies rebounded in 2023.

• Significant new addition: Grivalia Hospitality was added in 2022 when Fairfax increased its stake from 33.5% to 78.4% at a cost of $195 million. The position was increased further in 2023 to 85.2%.

• Significant increases in ownership: in 2022, Fairfax increased its stake in Recipe from 46% to 84% at a cost of $342 million. In 2022, Fairfax increased its stake in Sporting Life from 71% to 88.5% (funded via retained earnings).

• There also were a few notable sales / deconsolidations:
  • Restaurants & retail: Toys “R” Us Canada (deconsolidated on August 19, 2021)
  • Fairfax India: Privi (deconsolidated on April 29, 2021).
  • Other: Pethealth (deconsolidated on October 31, 2022) and Mosaic Capital (deconsolidated on August 5, 2021).

Bottom line, top line should grow nicely in 2024 and future years. And now a much larger share of earnings for these companies will flow through to Fairfax shareholders.

 

Pre-tax income at this group of holdings has been low the past four years due to significant temporary or one-time items.

 

As mentioned already, Covid was a significant headwind for Recipe, Thomas Cook India and Dexterra from 2020 to 2022. Thomas Cook India had a fantastic 2023. Recipe continues to right-size its business/structure/systems after a decade of rapid consolidation.

 

Farmers Edge took very large write downs in 2022 ($133.4 million) and 2023 ($112 million in losses) and the business is now carried at a $0 valuation. It was taken private by Fairfax in March of 2024. My guess is this business will stop bleeding money later in 2024.

 

Boat Rocker also saw a write down in 2023 ($26 million). This is now a small holding for Fairfax.

 

Grivalia Hospitality took a loss of $66 million in 2023. For the past couple of years, Grivalia has been investing heavily in building out its collection of ultra-high luxury resorts. 5 are now open. Revenue should materially increase in 2024. The company is pivoting its business from the investment phase to the operating phase which should lead to improving financial results.   

 

The significant temporary / one-time events of the past couple of years will likely decline in size moving forward. Headwinds will become tailwinds. And when they do, the earnings power of this collection of businesses will be released like a coiled spring.

 

Summary

 

The companies in this bucket of holdings have been undergoing significant positive changes over the past couple of years. (Just like the rest of Fairfax’s equity holdings.)

 

Poor performers are being wound down. Underperforming companies have been executing turn-around plans for the past couple of years and improved results are starting to show up. New holdings have been added in recent years. And Fairfax owns more of existing holdings.

 

Bottom line, the intrinsic value of the companies captured in this bucket has been increasing over the past three years. We should see earnings start to materially improve in the coming years. This group of companies is poised to become another meaningful and growing income stream for Fairfax.

 

Earnings estimate for 2024 and 2025

 

My current estimate is for this collection of holdings to deliver pre-tax earnings of $150 million in 2024 and $200 million in 2025. For reasons laid out above, these estimates will likely prove to be very conservative.

—————

A strategy question

 

Do we see Fairfax continue to build out this bucket of companies?

 

Do they aspire to become more of a holding company like Berkshire Hathaway in the coming years?

 

Are there strategic advantages to Fairfax of having a few large wholly owned cash generating equity holdings to complement their P/C insurance business?

 

What do board members think?

 

I don’t think Fairfax wants to go full Berkshire in the coming years. Unlike Berkshire, at the appropriate time, Fairfax sells assets - I expect Fairfax will monetize one or more of its non-insurance consolidated holdings in the coming years. And I suspect it is still a priority for Fairfax to grow its P/C insurance business.

----------

From Prem's Letter, FFH 2023AR: "As the table on page 15 shows, the consolidated investments include the following: Recipe, Fairfax India, Grivalia Hospitality, Thomas Cook India, Dexterra Group and Boat Rocker Media. Our consolidated investments are significant, producing total revenue of $6.6 billion and pre-tax income of $271 million in 2023. Fairfax India had pre-tax income of $380 million, Recipe $38 million, Thomas Cook $27 million and Dexterra $29 million. Those were offset by losses at Grivalia of $66 million, Boat Rocker $26 million and Farmers Edge of $112 million which included impairments of $64 million."

 

From Prem's Letter, FFH 2022AR: "As the table on page 13 shows, consolidated investments include the following: Recipe, Fairfax India, Grivalia Hospitality, Thomas Cook India, Boat Rocker Media, Dexterra Group and Farmers Edge. Our consolidated investments are significant, producing total revenue of $5.6 billion, EBITDA of $743 million and pre-tax income of $303 million (excluding a $133 million writedown of Farmers Edge) before minority interest in 2022."

 

Edited March 22, 2024 by Viking

[SafetyinNumbers]

On 3/21/2024 at 12:20 PM, dartmonkey said:

 

Yes, you have a point - although I myself am unlikely to add to my hugely oversized Fairfax position, the company is still repurchasing shares so I suppose we should rejoice in these misconceptions. And along the same line of thinking, there is no reason for us to wish for Fairfax to be included in the TSX 30, either. We get more shares repurchased for the same number of dollars, the longer the share price languishes. 

I think long term holders should prefer a much higher multiple because the optionality of raising money at a low cost of capital if it’s needed because of a shock or an opportunity comes along is worth more than buying shares at 1.2x BV. If the goal is a higher ROE and BVPS, a higher multiple helps a lot more.