Fairfax stock positions

[Viking]

3 hours ago, 73 Reds said:

Why do you think Fairfax continues to hold the remaining shares?

Prem just resigned from the board in Feb so it likely was not an option to sell before then. Moving forward my guess is Fairfax will treat BlackBerry like any other equity investment - hold it if they see it delivering on their (15%?) hurdle rate for equity investments. BlackBerry does play in some very interesting verticals.

 

What i like is the remaining position is so small that even of it went to zero it wouldn’t matter to Fairfax.

 

I would love to see them sell it. Just to get it off the books - like Resolute Forest Products. Just so we can stop being reminded about it every time we look at Fairfax’s collection of equity holdings. But that is based on emotion. 
 

The big learning for me in reviewing Fairfax’s investment exits/sales over the past 7 years is just how much they have improved their underlying business/profitability:

- late 2016 - exited equity hedges - this was the big one

- 2019 - APR sold to Altas/Poseidon

- late 2020 - exited last short position

- late 2020 - exit Fairfax Africa

- 2022 - sold Resolute Forest Products

- 2024 - exited BlackBerry debenture ($500 million)

 

This was an amazing pivot - in both size and philosophy. Its a little crazy, but Fairfax exiting the equity hedges in late 2016 was the belling ringing moment for shareholders that results/performance had bottomed. The equity hedge (we probably should include the short positions as well) was the root cause of Fairfax’s decade of underperformance. Value in the business has been growing since they exited those 2 positions, and significantly in recent years.

 

Since late 2018 it looks like Fairfax has been on mission to optimize its equity holdings.  Stop the hemorrhaging of cash. Get rid of the dogs. Reallocate the cash to better opportunities. 
 

The job looks pretty much done to me. What now? Watch the cash roll in. And the intrinsic value build. 
 

My guess is we start to see more sales like Stelco - perhaps one per year - where Fairfax surfaces significant value. Great time to be a shareholder. 

Edited July 19 by Viking

[SafetyinNumbers]

32 minutes ago, Viking said:

Prem just resigned from the board in Feb so it likely was not an option to sell before then. Moving forward my guess is Fairfax will treat BlackBerry like any other equity investment - hold it if they see it delivering on their (15%?) hurdle rate for equity investments. BlackBerry does play in some very interesting verticals.

 

What i like is the remaining position is so small that even of it went to zero it wouldn’t matter to Fairfax.

 

I would love to see them sell it. Just to get it off the books - like Resolute Forest Products. Just so we can stop being reminded about it every time we look at Fairfax’s collection of equity holdings. But that is based on emotion. 
 

The big learning for me in reviewing Fairfax’s investment exits/sales over the past 7 years is just how much they have improved their underlying business/profitability:

- late 2016 - exited equity hedges - this was the big one

- 2019 - APR sold to Altas/Poseidon

- late 2020 - exited last short position

- late 2020 - exit Fairfax Africa

- 2022 - sold Resolute Forest Products

- 2024 - exited BlackBerry debenture ($500 million)

 

This was an amazing pivot - in both size and philosophy. Its a little crazy, but Fairfax exiting the equity hedges in late 2016 was the belling ringing moment for shareholders that results/performance had bottomed. The equity hedge (we probably should include the short positions as well) was the root cause of Fairfax’s decade of underperformance. Value in the business has been growing since they exited those 2 positions, and significantly in recent years.

 

Since late 2018 it looks like Fairfax has been on mission to optimize its equity holdings.  Stop the hemorrhaging of cash. Get rid of the dogs. Reallocate the cash to better opportunities. 
 

The job looks pretty much done to me. What now? Watch the cash roll in. And the intrinsic value build. 
 

My guess is we start to see more sales like Stelco - perhaps one per year - where Fairfax surfaces significant value. Great time to be a shareholder. 

The sales are great because they boost book value which is what investors focus in but I’m really excited about what they buy and how much it can boost returns. 

The minority interests in the insurance subsidiaries seems like a layup. Maybe after hurricane season is over we will get an announcement on something.
 

After that corporates on spreads widening and quality equities including something like IDBI or large liquid stocks if there is an indiscriminate market sell off.
 

There is so much optionality to returns if they are able to buy well. 

[Parsad]

Should be good for FFH's Poseidon investment renewals or new contracts.  Cheers!

[Gamma78]

15 hours ago, Viking said:

Exiting the BlackBerry debenture investment has freed up $500 million in capital that has been re-invested into better opportunities where Fairfax should be able to earn a much higher rate of return. When Fairfax does this it is like they are

 

On reflection I think at specific points in the past 10 years Prem and the team have made calls on positions keeping in mind a "political backdrop" as justification for the investment. The "animal spirits" unleashed by Trump. The Modi narrative in India. The "help Canada" position on Blackberry (and some other investments as well).  We even heard it as a reason for investment in Eurobank (Greece political backdrop). I suspect some of this comes from investing in bonds, where macro conditions are taken into account by definition. 

 

I would much much prefer that on the equity component Prem and Fairfax act like Warren B. The "political backdrop" is not the main consideration (or perhaps is even irrelevant). Look at the quality of the company and the compounding it can have over time first and foremost. 

 

The problem is that in some ways we've discussed this on the board before - and the concept of "quality" can get murky. Right now to me it looks like "quality" in the eyes of the team at Fairfax is determining who their entrepreneurial partner is (Sokol, Byron Trott, etc). Though I don't always understand it, I am A-OK with that. 

[Daphne]

Political backdrop is ignored at your peril…its an important component of risk management.

[73 Reds]

13 hours ago, SafetyinNumbers said:

The sales are great because they boost book value which is what investors focus in but I’m really excited about what they buy and how much it can boost returns. 

The minority interests in the insurance subsidiaries seems like a layup. Maybe after hurricane season is over we will get an announcement on something.
 

After that corporates on spreads widening and quality equities including something like IDBI or large liquid stocks if there is an indiscriminate market sell off.
 

There is so much optionality to returns if they are able to buy well. 

I dunno; after quite the mea culpa one might assume that the resulting tax loss and even a 5% return on net sales proceeds, not to mention repurchasing FFX shares with the proceeds would generate a better result than continuing to hold equity in a company he no longer believes in.  I think it it this kind of decision that holds some people back from investing in FFX.

[SafetyinNumbers]

3 hours ago, 73 Reds said:

I dunno; after quite the mea culpa one might assume that the resulting tax loss and even a 5% return on net sales proceeds, not to mention repurchasing FFX shares with the proceeds would generate a better result than continuing to hold equity in a company he no longer believes in.  I think it it this kind of decision that holds some people back from investing in FFX.

 

Is this because you think the forward expected return is less than 5% or you just don't like seeing Blackberry in the portfolio because it's obviously not material to forward returns?

 

[Viking]

8 hours ago, Gautam Sahgal said:

On reflection I think at specific points in the past 10 years Prem and the team have made calls on positions keeping in mind a "political backdrop" as justification for the investment. The "animal spirits" unleashed by Trump. The Modi narrative in India. The "help Canada" position on Blackberry (and some other investments as well).  We even heard it as a reason for investment in Eurobank (Greece political backdrop). I suspect some of this comes from investing in bonds, where macro conditions are taken into account by definition. 

 

I would much much prefer that on the equity component Prem and Fairfax act like Warren B. The "political backdrop" is not the main consideration (or perhaps is even irrelevant). Look at the quality of the company and the compounding it can have over time first and foremost. 

 

The problem is that in some ways we've discussed this on the board before - and the concept of "quality" can get murky. Right now to me it looks like "quality" in the eyes of the team at Fairfax is determining who their entrepreneurial partner is (Sokol, Byron Trott, etc). Though I don't always understand it, I am A-OK with that. 

“I would much much prefer that on the equity component Prem and Fairfax act like Warren B.”

 

@Gautam Sahgal I used to think along the same line as you. But i am not so sure anymore. The more i think about/study Fairfax the more i am coming to understand and appreciate their unique approach/strengths to capital allocation.

 

When i was a new sales manager my focus initially was on fixing problems (problem employees or weaknesses of good employees). I learned over time that i had it ass backwards. I shifted and spent most of my time feeding my best employees (stars) and getting my weaker performers to focus on their strengths. 
 

I want to see Fairfax do what they are outstanding at: 

- Flexible

- Creative

- Unconventional

- Conviction

- Long term focus

 

Look at some of Fairfax’s best investment the past 4 years:

- total return swaps: 1.96 million shares at $373/share

- dutch auction taking out 2 million shares at $500/share

- managing average duration of fixed income portfolio

- selling pet insurance for $1 billion gain after tax

- selling RFP at peak pricing.

- the Stelco investment (buy and sell).

- i could go on.

 

Asset sales are a big part of Fairfax capital allocation framework. As is seeding startups like First Capital, ICICI Lombard and now Digit. 

 

Would Warren Buffet have done any of these things? 

Fairfax also appears to have no desire to become a conglomerate. And they appear to be dramatically shrinking the size of the company (with all the buybacks). Not what Warren would do.
 

Fairfax’s capital allocation has been exceptional since 2018. For the past 5 years Fairfax’s management team has been best-in-class among P/C insurers. They are on a hot streak.  Do you tell a star basketball player how to shoot a basketball? (I.E. tell Larry Bird he would be a better basketball player if only he shot the ball like Magic Johnson?)
 

They look singularly focussed on growing long term per share value for shareholders. 
 

I hope they continue to do the things they are really good at. 

Edited July 20 by Viking

[73 Reds]

27 minutes ago, SafetyinNumbers said:

 

Is this because you think the forward expected return is less than 5% or you just don't like seeing Blackberry in the portfolio because it's obviously not material to forward returns?

 

Both, I suppose.  Even if Blackberry shares can earn a >5% annual return is it truly a better idea than any return generated by the tax loss and reallocation of net sales proceeds?  As a steward of capital, isn't that a more logical approach than holding shares in a company that you've called a terrible investment?  Despite its value now being a mere blip on the radar, it is certainly talked about and thought about disproportionate to all the company's success.  Anyone looking at the Fairfax portfolio and considering making an investment sees it for what it is.  

[SafetyinNumbers]

52 minutes ago, 73 Reds said:

Both, I suppose.  Even if Blackberry shares can earn a >5% annual return is it truly a better idea than any return generated by the tax loss and reallocation of net sales proceeds?  As a steward of capital, isn't that a more logical approach than holding shares in a company that you've called a terrible investment?  Despite its value now being a mere blip on the radar, it is certainly talked about and thought about disproportionate to all the company's success.  Anyone looking at the Fairfax portfolio and considering making an investment sees it for what it is.  

I don’t Fairfax is interested in hiding their mistakes like a lot of active

institutional money managers often do.

 

I have mistakes in my portfolio that I don’t sell because the expected return higher or because if I tried to sell, I wouldn’t actually get the price on the screen because I own too much.

 

You are right though that it might hurt the multiple but eventually I assume our shareholder base will be willing to afford the shares a higher multiple.

 

 

[73 Reds]

Yes, hiding a mistake is not appropriate but neither is perpetuating a mistake.  I really do think this gives pause to prospective new investors.  

[UK]

10 hours ago, Gautam Sahgal said:

Right now to me it looks like "quality" in the eyes of the team at Fairfax is determining who their entrepreneurial partner is (Sokol, Byron Trott, etc). Though I don't always understand it, I am A-OK with that. 

 

I do not think Buffett differs that much in this "right people/partner" approach? Personally I find this very important and after all years and some really unpleasant experience with all these "independant" boards or CEOs with a maximum of 3-5 year time frame, I am really hesitant to put much money into anything without right people / alligned owner etc. This is also probably the main reason of FFH succes and to invest in FFH in the first place, at least for me:). Many other cheaper/better/whatever insurance companies without owner operator I can trust? Thanks but no:)

 

Edited July 20 by UK

[SafetyinNumbers]

3 hours ago, 73 Reds said:

Yes, hiding a mistake is not appropriate but neither is perpetuating a mistake.  I really do think this gives pause to prospective new investors.  

I think you’re right but you are assuming that they are perpetuating a mistake. I assume they are trying to make the best capital allocation decision given the context (which we don’t fully know as outsiders). 

 

From my experience people who point to BlackBerry as a reason not to invest are just looking for an excuse. They really don’t want to invest ahead of the next mistake which may have already happened but it’s a position that investors generally like.

Kind of like the hedges until 2016. They were loved  (as expressed in the premium P/B multiple) back then but it was clearly a mistake with hindsight or maybe that’s just resulting.

 

[73 Reds]

7 minutes ago, SafetyinNumbers said:

I think you’re right but you are assuming that they are perpetuating a mistake. I assume they are trying to make the best capital allocation decision given the context (which we don’t fully know as outsiders). 

 

From my experience people who point to BlackBerry as a reason not to invest are just looking for an excuse. They really don’t want to invest ahead of the next mistake which may have already happened but it’s a position that investors generally like.

Kind of like the hedges until 2016. They were loved  (as expressed in the premium P/B multiple) back then but it was clearly a mistake with hindsight or maybe that’s just resulting.

 

Well, Prem Watsa acknowledged that Blackberry was a bad investment.  Is an admittted bad investment better than any (every!) other alternative?  Of course I've not always understood Buffett's reasoning either but there is always some inherent logic to what he does.  The only rationale that makes sense to me here is that the company is trying to discourage new buyers in order to keep the stock price down for as long as possible in order to repurchase more cheap shares.  If that is the intended goal, holding all remaining BB shares is a relatively cheap price to pay.

[rkbabang]

On 7/20/2024 at 1:40 PM, 73 Reds said:

Yes, hiding a mistake is not appropriate but neither is perpetuating a mistake.  I really do think this gives pause to prospective new investors.  

 

Exactly. And when it inevitably goes to zero and it will (I believe I said exactly this in 2010 somewhere on this board, I am quite surprised the company still exists to be honest), people will be wondering why they didn’t get over $100M for it when they still could. Sure it’s not a significant portion of their portfolio anymore, but it isn’t nothing. Selling it is a signal to new investors that they understand their mistakes and are unlikely to repeat them.

 

[nwoodman]

Eurobank hung onto its highs and closed as a $3bn+ position for Fairfax for the first time

 

3 coffees in and still can’t get my head  around  the purchase of ZZZ now.  Seems to me this should have been a blood in the streets acquisition if they were going to do it all.  The consolation is they are paying prices last seen 7 years ago. It should work out OK at this price but seems lower quality than what I would have hoped for given the deal size.

[Hoodlum]

44 minutes ago, nwoodman said:

Eurobank hung onto its highs and closed as a $3bn+ position for Fairfax for the first time

 

it looks like Eurobank is moving forward with Hellenic Bank, with or without the remaining shareholders.  The market still looks at this as a positive for Eurobank. 
 

https://knews.kathimerini.com.cy/en/news/fifteen-days-left-to-decide-on-eurobank-s-offer

[nwoodman]

Some more colour on Regulation 379/2014, I think this is what gives Eurobank the edge here as the possibility of delisting is highly likely:
 

Regulation 379/2014 of the Cyprus Securities and Exchange Commission specifies certain minimum share dispersal criteria for companies listed on the main market of the Cyprus Stock Exchange:

- At least 25% of the shares proposed for listing must be held by the wider public (free float requirement)
- The shares must be held by at least 300 natural persons or legal entities 

So this regulation aims to ensure a minimum level of diverse public ownership for companies listed on the CSE main market.
 

The 25% free float requirement prevents a small group of insiders from holding all or most of a publicly listed company's shares.

And the 300 person minimum helps ensure the shares are reasonably widely held rather than just technically meeting the 25% threshold among a very small number of public shareholders.

 

These provisions promote shareholder diversity and broader public participation in the ownership of listed companies on the Cyprus Stock Exchange main market. 
 

Key thresholds: 

Based on Cypriot corporate law, the following shareholder approval percentages are required for various corporate actions:

 

Ordinary Resolution (over 50% approval required):

- Appointment and removal of company directors 

- Alteration of the company's share capital (increase, consolidation, division, sub-division, cancellation, conversion of paid-up shares into stock)

- Appointment and removal of auditors

Special Resolution (at least 75% approval required): 

- Amendment of the memorandum of association

- Amendment of the articles of association 

- Change of company name

Reduction of share capital

- Variation of shareholders' rights (unless a higher threshold is specified in the articles of association)

Extraordinary General Meeting (EGM):

Shareholders holding at least 10% of the paid-up capital with voting rights can requisition the directors to convene an EGM. This right cannot be waived or varied by the articles of association.

So delisting is likely and Eurobank has the right to fire the existing board and put their own directors in.  I can’t find any further minority protections.  I guess they can argue oppression but that is difficult with takeover clearance given and other sophisticated investors already accepting lower bids.  @hoodlum as you say,  the market is giving developments the

 

 

 

[petec]

On 7/20/2024 at 3:35 AM, Parsad said:

Should be good for FFH's Poseidon investment renewals or new contracts.  Cheers!

 

Wow.

 

No direct benefit to Poseidon but their customers will be flush.

 

Might be a direct benefit to Brookfield, after their purchase of Triton - not sure how much of their containers are exposed to spot.

 

 

[Viking]

Stock of Quess, India’s leading business services provider and former high flyer, has recovered over past 2.5 years. Fairfax's stake is worth $435m. MV is once again greater than CV. Like when IIFL did it, Quess’ planned split into 3 companies in 2025 looks like a smart move.

 

Of interest:

• Quess is Fairfax's #12 largest equity holding.
• Quess' stock price was 855 rupee at Dec 31, 2021.

Edited July 26 by Viking

[glider3834]

One of Fairfax's most interesting positions, integrated energy utility and green metallurgy business Metlen (MYTIL.AT) (formerly Mytilineos) results out

 

https://www.ekathimerini.com/economy/1244896/metlen-registers-record-profits-in-january-june/

 

Edison have an analyst report on Metlen & below is a quote from this report with their take on valuation.

 

https://www.edisongroup.com/research/a-new-name-for-its-next-phase/33738/

 

'Valuation: Undervalued for a €1bn+ EBITDA business

Metlen currently trades at P/E multiples of 7.7x in FY24e and 7.2x in FY25e. It trades at EV/EBITDA ratios of 6.0x in FY24e and 5.6x in FY25e (our estimates are broadly in line with consensus), a significant discount to peers. As a comparison, its peer group trades at a range of multiples, from 5.2x for metals to 9.7x for RES, with an FY24 Metlen EBITDA-weighted average of 7.7x, a 38% premium to Metlen’s market multiple. In our view, Metlen’s multiple looks low for a business that has high-quality, low-cost assets in power generation and aluminium production, and very low for a company with a high-growth renewable energy business that accounts for almost one-third of its earnings. We value Metlen at €49/share (up from €45 in our last update). Our DCF valuation has risen to €47/share after incorporating recent results and some minor adjustments to earnings based on commodity, energy and electricity price assumptions, which are broadly in line with forward curves, and we now blend this with a peer multiple valuation of €51/share to reflect the potential of peer re-rating with an additional listing.'

 

 

[Gamma78]

"So much advantage in life comes from being willing to look foolish in the short term". 

 

Was thinking about this sentence tied to a lot of Fairfax's portfolio. 

Also, just a great blog: https://fs.blog/brain-food/august-14-2022/

[nwoodman]

Tidy set of  results out of Eurobank. MS upgraded their price target to €2.68 (+13.5%).  Or around $3.5bn+ in terms of Fairfax’s stake.
 

Note attached and summary as follows:

 

1. Eurobank beat estimates, with adjusted net income 16%/9% above Morgan Stanley/consensus estimates. NII and expenses both better than expected.

2. The bank raised guidance:
- FY24 ROATE to ~16.5% (from ~15% previously)
- Core operating profit to >€1.6bn (from >€1.5bn)
- NPE ratio lowered to ~3% (from <3.5%)

 

3. Key financial metrics:
- Net interest income: €561mn (-2% QoQ, +4% YoY)
- Net fee and commission income: €147mn (+8% QoQ, +4% YoY) 
- Operating expenses: €228mn (flat QoQ, +3% YoY)
- Provisions: €73mn (+2% QoQ, -18% YoY)
- Adjusted net profit: €349mn (-9% QoQ, +2% YoY)

 

4. Asset quality improved, with NPE ratio at 3.1% and coverage at 93.2%.

 

5. Capital position remains strong with CET1 ratio at 16.2%.

 

6. Performing loan growth accelerated to €0.8bn in Q2, driven by SEE operations and Greek corporate lending.

 

7. Eurobank completed acquisition of a 55.9% stake in Hellenic Bank.

Risks to Upside

- Faster-than-expected loan growth, driven by EU funds and macro recovery in Greece

- Higher-than-expected fee and commission income growth

- Stronger macro drives NPE levels below our expectations

 

Risks to Downside

- Early-stage recovery in macro environment is vulnerable to external shocks

- Absorption of EU funds is weaker than expected

 

EUROBANK_20240731_1544.pdf

[Viking]

33 minutes ago, nwoodman said:

Tidy set of  results out of Eurobank. MS upgraded their price target to €2.68 (+13.5%).  Or around $3.5bn+ in terms of Fairfax’s stake.
 

Note attached and summary as follows:

 

1. Eurobank beat estimates, with adjusted net income 16%/9% above Morgan Stanley/consensus estimates. NII and expenses both better than expected.

2. The bank raised guidance:
- FY24 ROATE to ~16.5% (from ~15% previously)
- Core operating profit to >€1.6bn (from >€1.5bn)
- NPE ratio lowered to ~3% (from <3.5%)

 

3. Key financial metrics:
- Net interest income: €561mn (-2% QoQ, +4% YoY)
- Net fee and commission income: €147mn (+8% QoQ, +4% YoY) 
- Operating expenses: €228mn (flat QoQ, +3% YoY)
- Provisions: €73mn (+2% QoQ, -18% YoY)
- Adjusted net profit: €349mn (-9% QoQ, +2% YoY)

 

4. Asset quality improved, with NPE ratio at 3.1% and coverage at 93.2%.

 

5. Capital position remains strong with CET1 ratio at 16.2%.

 

6. Performing loan growth accelerated to €0.8bn in Q2, driven by SEE operations and Greek corporate lending.

 

7. Eurobank completed acquisition of a 55.9% stake in Hellenic Bank.

Risks to Upside

- Faster-than-expected loan growth, driven by EU funds and macro recovery in Greece

- Higher-than-expected fee and commission income growth

- Stronger macro drives NPE levels below our expectations

 

Risks to Downside

- Early-stage recovery in macro environment is vulnerable to external shocks

- Absorption of EU funds is weaker than expected

 

EUROBANK_20240731_1544.pdf 234.17 kB · 1 download

 

@nwoodman thanks for sharing. The management team at Eurobank continues to underpromise and overdeliver. As you pointed out they raised full year guidance initially provided in March. The updated guidance is below.

• https://www.eurobankholdings.gr/-/media/holding/omilos/grafeio-tupou/etairikes-anakoinoseis/2024/2q2024/2q2024-results-presentation.pdf

 

Edited July 31 by Viking

[Haryana]

On 7/26/2024 at 11:23 AM, Viking said:

Stock of Quess, India’s leading business services provider and former high flyer, has recovered over past 2.5 years. Fairfax's stake is worth $435m. MV is once again greater than CV. Like when IIFL did it, Quess’ planned split into 3 companies in 2025 looks like a smart move.

 

Of interest:

• Quess is Fairfax's #12 largest equity holding.
• Quess' stock price was 855 rupee at Dec 31, 2021.

 

The latest surge came along with the recent India budget that placed focus on youth training and employment.

https://www.screener.in/company/QUESS/consolidated/