Fairfax stock positions

[petec]

6 hours ago, nwoodman said:

AerCap springs to mind.  Maybe GATX.  However there is an operational/service aspect that is unique to Seaspan (crew, maintenance, compliance etc). I always figured between capital allocation and the ops side of the business it was a good fit for Sokol. 

 

Exactly this. It is Aercap without the rational OEM suppliers. 

 

If you want a simple sector comparison then it is a specialist investment bank. It captures the spread between the capital it can raise and the capital it can lease out. Being a great operator and having a good platform matters but really, as in investment and insurance, the only real differentiator in the long term is management. 

 

It is definitely not a utility, since these tend to be characterised by local monopolies and regulated returns.

[Viking]

Peak Achievement (Bauer, Easton/Rawlings & Maverick)

 

In February of 2017, Fairfax partnered with Paul Desmarais III and his team at Sagard Capital to purchase Performance Sports out of bankruptcy. The new company was re-named Peak Achievements. Fairfax paid $154 million for a 42.6% equity and 50% voting interest in Peak.

 

At the time of purchase, Performance Sports housed three of the top sports brands in North America:

• Bauer - the leading brand in hockey
• Easton - the #3 brand in baseball
• Maverik - a leading brand in lacrosse

In 2020, Peak partnered with Rawlings’ controlling shareholder, Seidler Equity Partners, and merged Easton with Rawlings. Peak received a payment of $65 million and a 28% interest in Rawlings. In Q2-2024, Peak sold its 28% stake in Rawlings. The sale amount was not disclosed; share of profit of associates for Peak in Q2-2024 was a significant $31.5 million.

 

It should be note that Covid in 2020 and 2021 hit sports manufacturers especially hard.

 

Is Peak up for sale?

 

There are fresh reports that Bauer is now up for sale (or do they mean Peak?).

 

From the article in the Globe & Mail:

 

“Sagard and Fairfax acquired Bauer out of bankruptcy in 2017 for US$575-million and are targeting a US$800-million exit, according to one of the sources. Bauer’s EBITDA is just more than US$100-million annually, the source said.

 

“In early August, Bauer’s advisers received expressions of interest from 11 potential buyers and moved to the next stage of the sale process with eight players, including several U.S. private equity funds, according to the source, and several bidders for Bauer also looked at CCM.

 

“Bauer set a Sept. 16 deadline to move forward with a maximum of four bidders, and plans to be in the final round of negotiations with one buyer by the end of October, the source said.”

• https://www.theglobeandmail.com/business/article-ccm-bauer-true-hockey-sale/#:~:text=Sagard%20and%20Fairfax%20acquired%20Bauer,to%20one%20of%20the%20sources.

Financial overview

 

In February of 2017, Fairfax paid $154 million for a 42.6% stake in Peak. Over the subsequent 6.80 years (to December 31, 2023), Fairfax has received total dividend payments from Peak of $72 million. Given the sale of Rawlings in Q2, we could see an outsized dividend payment to Fairfax in 2024.

 

Assuming the fair value estimate for Peak is accurate, Fairfax has earned a total return of about 94% on its investment over the past 6.8 years (to Dec 31, 2023) = CAGR of 10%.

 

 

Summary

 

Despite Covid related challenges in 2020/2021 (bad luck), over the past 6.8 years, Peak has developed into a solid business/investment for Fairfax. If the company is sold in the coming months at a premium to ‘fair value’ it would likely become a very good investment for Fairfax.

 

Summary of financial information provided by Fairfax

 

—————

Notes from Fairfax annual and quarterly reports:

 

2024 Q2 Report

 

Consolidated share of profit of associates of $221.4 in the second quarter of 2024 principally reflected share of profit of $126.1 from Eurobank, $66.5 from Poseidon and $31.5 from Peak Achievement (principally reflecting its sale of Rawlings Sporting Goods), partially offset by share of loss of $39.0 from Sanmar Chemicals Group.

 

2023AR

 

Fairfax continues to jointly own Peak Achievement with our partner, Sagard Holdings. Peak’s core brands are Bauer, the leading hockey brand, and Maverik, a leading lacrosse brand. Peak also owns a minority investment in Rawlings, which is the number one brand in baseball. Fairfax paid $154 million for its stake in Peak in 2017. Since that time, EBITDA has increased steadily in the hockey and lacrosse businesses, and Fairfax has received $72 million in dividends. Hockey participation growth continues post-pandemic and exciting developments such as Bauer’s partnership with the new Professional Women’s Hockey League are expected to drive incremental girls’ participation. More to come under CEO Ed Kinnaly’s leadership, with opportunities in direct-to-consumer, apparel and training. We carry Peak on our balance sheet at less than 5x free cash flow.

 

2020AR

 

Fairfax continues to jointly own Peak Achievement with our partner, Sagard Holdings led by Paul Desmarais III. Peak’s core assets are Bauer, the leading hockey brand, and Easton, the number three manufacturing player in baseball. During 2020 Peak merged Easton with Rawlings, the clear number one manufacturer in baseball. The transaction resulted in $65 million cash paid to Peak, while retaining a 28% stake in Rawlings. Peak is now partnered with Rawlings’ controlling shareholder, Seidler Equity Partners. Fairfax recognized a $15 million gain on the sale of Easton which closed just before year end.

 

2017AR

 

On March 1, 2017 the restructuring of Performance Sports Group Ltd. (‘‘PSG’’) was substantially completed after all of the assets and certain related operating liabilities of PSG were sold to an intermediate holding company (‘‘Performance Sports’’) co-owned by Fairfax and Sagard Holdings Inc. The company’s $153.5 equity investment in Performance Sports represents a voting interest of 50.0% and an equity interest of 42.6%. On April 3, 2017 Performance Sports was renamed Peak Achievement Athletics Inc. (‘‘Peak Achievement’’).

 

2016AR

 

Also, early in 2017 we partnered with Paul Desmarais III and his excellent team at Sagard Capital to purchase Performance Sports. Performance Sports is the owner of the leading names in hockey, baseball and lacrosse equipment: Bauer, Easton and Cascade.

—————

Performance Sports Group completes sale of substantially all of its assets to investor group led by Sagard and Fairfax Financial (article from Feb 27, 2017)

• https://www.torys.com/en/work/2016/10/52382aeb-7e85-42dd-903c-309be9bb261a

Edited August 27, 2024 by Viking

[adventurer]

Hello all,

 

consider the excerpt attached of the Fairfax annual letter for 2023. I don`t understand how Exco Resources is being carried at $418 million or $18,24 per share on the balance sheet while the company itself has never reached that valuation. 

What am I missing?

[SafetyinNumbers]

1 minute ago, adventurer said:

Hello all,

 

consider the excerpt attached of the Fairfax annual letter for 2023. I don`t understand how Exco Resources is being carried at $418 million or $18,24 per share on the balance sheet while the company itself has never reached that valuation. 

What am I missing?

It’s equity accounted for since FFH owns more than 20% and less than 50%. FFH increases the carrying value by its share of earnings every quarter. The trading price in the illiquid OTC trading market isn’t relevant. 

[adventurer]

18 minutes ago, SafetyinNumbers said:

It’s equity accounted for since FFH owns more than 20% and less than 50%. FFH increases the carrying value by its share of earnings every quarter. The trading price in the illiquid OTC trading market isn’t relevant. 

Ah ok, so due to the equity accounting method profits over the years increased the value of the investment even though the company`s market cap never reached that amount.

The company has a market cap of approx. $200 million. Does anyone know when FFH invested in Exco for the first time? Because over $218 million in profits seems like a lot. 

[SafetyinNumbers]

3 hours ago, adventurer said:

Ah ok, so due to the equity accounting method profits over the years increased the value of the investment even though the company`s market cap never reached that amount.

The company has a market cap of approx. $200 million. Does anyone know when FFH invested in Exco for the first time? Because over $218 million in profits seems like a lot. 

They had a bond investment that was reorganized into equity during bankruptcy in 2019. 
 

[TwoCitiesCapital]

4 hours ago, adventurer said:

Ah ok, so due to the equity accounting method profits over the years increased the value of the investment even though the company`s market cap never reached that amount.

 

Correct. The carrying value is increased for their proportional earnings and decreased for any dividends paid. 

 

It's a bit of a crude mechanism assuming the purchase price plus retained earnings is the value, but it's grounded in reason. 

[SafetyinNumbers]

5 hours ago, TwoCitiesCapital said:

 

Correct. The carrying value is increased for their proportional earnings and decreased for any dividends paid. 

 

It's a bit of a crude mechanism assuming the purchase price plus retained earnings is the value, but it's grounded in reason. 

The mechanics are interesting and help explain why consensus estimates are way too low on any FTM period. Eurobank for example trades at ~6x earnings but our carrying value is lower than the market value so the earnings yield boosts returns of the non-fixed income portfolio disproportionately especially given its size. 

Edited August 28, 2024 by SafetyinNumbers

[nwoodman]

Reuters article summarising the state of play in India.  I hadn’t realised Emirates NDB were also in the running for Yes Bank.  

 

Foreign lenders lured by rare stake sales in India banks, but tighter rules weigh

 

Summary:

1. Stake sales:
   - Yes Bank: 51% stake
   - IDBI Bank: 60.72% stake

2. Interested foreign entities:
   - SMBC (Japan), Emirates NBD, Fairfax Group (Canada)

3. Indian market attractiveness:
   - Economic growth forecast: 7.2%
   - Bank credit growth: ~14.4% (2x economic growth)
   - Gross bad loans: 2.8% of total assets

4. Foreign lenders' market share:
   - March 2000: 8.4%
   - March 2024: 3.4%

5. State-owned banks' dominance:
   - 52% of bank credit

6. Valuations:
   - Yes Bank: ~$10 billion, 1.58x 12-month forward P/B
   - IDBI Bank: $10.4 billion, 1.97x 12-month trailing P/B
   - Sector median P/B: 1.45x

7. Regulatory requirement:
   - Reduce shareholding to 26% over 15 years  refer

• Reserve Bank of India(Acquisition and Holding of Shares or Voting Rights in Banking Companies) Directions, 2023
• Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies

8. Timeline:
   - IDBI Bank financial bids expected by end of current fiscal year

Edited August 29, 2024 by nwoodman

[This2ShallPass]

On 8/28/2024 at 12:48 AM, adventurer said:

Ah ok, so due to the equity accounting method profits over the years increased the value of the investment even though the company`s market cap never reached that amount.

The company has a market cap of approx. $200 million. Does anyone know when FFH invested in Exco for the first time? Because over $218 million in profits seems like a lot. 

I bought Exco (following Chou) when it was ~$0.7. Then in a moment of dumbness sold it for a good % gain ~$5.5 (but $ wise less as I had a small position). Should have just let it ride, now we cannot buy Exco, brokers only allow closing.

 

Here's what Francis Chou had to say about Exco in his semi annual report. Might give you another perspective on value.

 

"In early July 2019, the company emerged from bankruptcy and the 1.75 lien term loans were converted to 28.38 equity shares for every US$1,000 in par value, after netting out certain adjustments. The equivalent price was US$9.51 per share of EXCO. Since it is a private company, I am not at liberty to divulge the latest financial statements, but what I can tell you is that my calculation of its PV-10 value was more than US$1.8 billion (roughly US$38 per share) based on the New York Mercantile Exchange (NYMEX) forward pricing as of December 31, 2023, and the net proved reserves were 2.9 trillion cubic feet equivalent. Its number of outstanding shares as of December 31, 2023 was 47,386,708. We estimate its EBITDA for the year ending 2024 will be between US$200 million and US$250 million. As a comparison, in 2018, the PV-10 value was US$750 million. As of June 30, 2024, the share of EXCO was valued at $21.05 by Kroll, an independent third-party valuator."

 

 

 

 

 

 

[Junior R]

52 week high over $1700 CAD today lol

[value_hunter]

2 hours ago, Junior R said:

52 week high over $1700 CAD today lol

Is this a pattern? Every time when hit an all time high, it will quickly retreat.

[SafetyinNumbers]

1 hour ago, value_hunter said:

Is this a pattern? Every time when hit an all time high, it will quickly retreat.

I think retail shareholders sell based on price not value. Buying is mostly institutional which is purchased on percentage of volume so they don’t set price, the sellers do.

[Junior R]

19 hours ago, value_hunter said:

Is this a pattern? Every time when hit an all time high, it will quickly retreat.

maybe shorts lol all good as long as Fairfax keep growing book value and eps

[glider3834]

On 7/23/2024 at 4:29 PM, nwoodman said:

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

 

 

 

Hellenic share price now up to 3.84 euros which is closer to TBV - not sure what Eurobank is going to do from here with remaining minority shareholders - Eurobank stake in Hellenic has more than doubled from their cost base - mkt value ~0.89B euro (~US$1B)

Edited September 25, 2024 by glider3834

[glider3834]

not sure if any salient commentary in here on Seaspan - it has a paywall

 

https://www.tradewindsnews.com/containers/inside-seaspan-understanding-major-newbuilding-investments-and-what-comes-next/2-1-1708114

[nwoodman]

3 hours ago, glider3834 said:

not sure if any salient commentary in here on Seaspan - it has a paywall

 

https://www.tradewindsnews.com/containers/inside-seaspan-understanding-major-newbuilding-investments-and-what-comes-next/2-1-1708114

 Cheers, PDF attached.  Summary as follows:

 

1. Massive Newbuilding Programme: Seaspan has placed orders for 70 container ship newbuildings, delivered at a rate of one per week, to be completed by early 2025. This significant expansion is driven by demand, and the company is on track to finalize 32 additional newbuildings in 2024. Out of these, 23 vessels will remain under Seaspan's ownership.

 

2. Fleet Size and Capacity: By the end of 2024, Seaspan’s fleet will comprise close to 200 vessels with a combined capacity nearing 2 million TEU (twenty-foot equivalent units), making Seaspan one of the largest independent tonnage providers in the industry.

 

3. Diversification into Car/Truck Carriers: In addition to its container ships, Seaspan has diversified into the car/truck carrier market, ordering six newbuildings for Hyundai Glovis, set for delivery in 2026.

 

4.Fuel Flexibility and Retrofits: Seaspan is investing heavily in fuel innovations, particularly LNG and methanol. It is currently retrofitting five of its existing vessels, converting them to methanol dual-fuel, at a cost of $20 million to $25 million per retrofit, compared to the price of a newbuild at around $150 million to $160 million. This retrofit project, involving ships chartered to Hapag-Lloyd, is part of a broader fuel strategy, with Seaspan expecting to have between 50 and 60 LNG dual-fuelled vessels in its fleet.

 

5.New Investments in Dual-Fuel Technology: Seaspan is also pursuing ammonia dual-fuelled container ships, with approval for a 3,000 TEU feeder ship that can scale either way. These initiatives demonstrate the company’s commitment to greener shipping options while balancing financial sustainability.

 

6. Financial Discipline: COO Torsten Pedersen emphasized that Seaspan does not sign newbuilding contracts without charter agreements already in place, ensuring the company does not take unnecessary financial risks. This approach helps the company mitigate tail-end risk while staying agile in a fast-changing market.

 

 

What is a Feeder Ship?

 

A feeder ship is a smaller vessel used to transport containers between smaller ports (often referred to as "feeder ports") and larger ports (known as "hub ports") that serve as main shipping destinations for large, ocean-going vessels. Feeder ships typically have a smaller capacity, usually ranging between 300 TEU to 3,000 TEU, compared to the much larger container ships that can carry tens of thousands of TEUs.

 

Feeder ships are an essential part of the global shipping network, as they help consolidate cargo from smaller ports, moving it to larger ports where the goods can be transferred to bigger vessels for international or long-haul shipping. Similarly, they are used to distribute containers from large hub ports to smaller, regional destinations.

This feeder system allows for cost efficiencies by concentrating large amounts of cargo at central hubs while still ensuring access to smaller ports that cannot accommodate larger vessels.

Inside Seaspan Understanding major newbuilding investments and what comes next TradeWinds.pdf

Edited September 25, 2024 by nwoodman

[villainx]

Wonder if Seaspan or other Atlas biz would have been part of Berkshire if things went differently.

[Viking]

Estimate of change in value of Fairfax’s equity portfolio in Q3 - 2024

 

Fairfax’s equity portfolio (that I track) increased in value in Q3, 2024 by about $800 million (pre-tax) or 4.0%, which is a solid result. It had a total value of about $20.7 billion at September 30, 2024. After being a headwind in 1H 2024 (on US$ strength), currency flipped to being a tailwind in Q3 (on US$ weakness).

 

 

Notes:

• I include the FFH-TRS position in the mark to market bucket and at its notional value. I also include warrants and debentures that Fairfax holds in the mark to market bucket.

My tracker portfolio is not an exact match to Fairfax’s actual holdings. It is useful only as a tool to understand the rough change in Fairfax’s equity portfolio (and not the precise change).

 

My equities tracker does not include the change in value of Digit, Fairfax's P/C insurance company in India that is now publicly traded. The total value of Digit increased about $400 million in Q3. This amount needs to be adjusted to reflect Fairfax's ownership stake.

 

Split of total holdings by accounting treatment

 

About 47% of Fairfax’s equity holdings are mark to market - and will fluctuate each quarter with changes in equity markets. The other 53% are Associates and Consolidated holdings. The Sleep Country and Peak Achievement (Bauer) acquisitions (which are expected to close in Q4) will significantly increase the consolidated bucket of holdings.

 

Over the past couple of years, the share of the mark to market holdings has been shrinking. This means Fairfax's quarterly reported results will be less impacted by volatility in equity markets.

 

 

Split of total gains by accounting treatment

 

• The total change is an increase of about $800 million = $36/share (pre-tax)
• The mark to market change is an increase of about $315 million = $14/share. This does not include the gain on the sale of Stelco when it closes (expected in Q4). The change in this bucket of holdings will show up in ‘net gains (losses) on investments’ (along with changes in the value of the fixed income portfolio) when Fairfax reports each quarter.

 

 

What were the big movers in the equity portfolio Q1-YTD?

• Stelco is up $288 million. Fairfax is expected to book an estimated pre-tax gain of $390 million on the sale of its 13 million shares in Stelco. The sale is expected to close in Q4 2024.
• The FFH-TRS is up $241 million and is now Fairfax’s second largest holding at $2.5 billion.
• Eurobank is up $161 million. Currency has been a tailwind in Q3 (strong Euro).
• Quess continues its big move higher, and is up another $104 million. Market value of $473 million now exceeds carrying value of $434 million.
• Thomas Cook India, down $144 million, gave back some of its recent gains. Market value of $726 million significantly exceeds carrying value of $218 million.

 

Excess of fair value over carrying value (not captured in book value)

 

For Associate and Consolidated holdings, the excess of fair value to carrying value is about $2.0 billion pre-tax ($89/share). The 'excess' of FV to CV has been materially increasing in recent years. This is a good example of how book value at Fairfax is understated.

 

Excess of FV over CV:

• Associates:           $1.3 billion = $59/share
• Consolidated:       $661 million = $30/share

Equity Tracker Spreadsheet explained

 

We have separated holdings by accounting treatment: 

• Mark to market
• Associates – equity accounted 
• Consolidated
• Other Holdings – total return swaps and warrants and debentures

The value of each holding is calculated by multiplying the share price by the number of shares. All holdings are tracked in US$, so non-US holdings have their values adjusted for currency.

 

This spreadsheet contains errors. It is updated as new and better information becomes available.

 

 

 

 

Fairfax Oct 1 2024.xlsx

Edited October 2, 2024 by Viking

[dartmonkey]

Thanks Viking, very helpful to see these changes, even if the consolidated holdings are harder to guess at.

 

Some additional excess to fair value in the associates, with FIH, hopefully, too. 

 

In the mark to market bucket, I'm curious, you have smaller holdings going down from $65m (Ensign) to Johnson & Johnson ($13m), and then 'Remaining Smaller Holdings' worth $2145m (unchanged from June 30). It's hard to believe there are enough tiny holdings to get up to the equivalent of 200+ stakes worth $10m or smaller, or is it? Where do you get this figure?

 

 

[Viking]

3 hours ago, dartmonkey said:

In the mark to market bucket, I'm curious, you have smaller holdings going down from $65m (Ensign) to Johnson & Johnson ($13m), and then 'Remaining Smaller Holdings' worth $2145m (unchanged from June 30). It's hard to believe there are enough tiny holdings to get up to the equivalent of 200+ stakes worth $10m or smaller, or is it?

 

Where do you get this figure?

 

@dartmonkey, when putting together my summary of Fairfax's equity holdings:

1.) I start with the summary Fairfax provides in their annual report each year. This provides a great deal of information (all the different buckets and sub-buckets).

2.) Then layer in holdings that we know about but that Fairfax did not have in the annual report (these amounts will be subtracted from the sub totals so they do not get counted twice).

3.) Then incorporate new news each quarter: 13F, Fairfax announcements etc.

 

When each annual report comes out I start at the beginning again. 

----------

As you rightfully note, there are holdings worth billions in value that we know little about (what the holdings are and how they are doing over the year).

---------

As a result, my estimate (tracking spreadsheet) is usually light when it comes to estimating actual reported gains and losses from investments.

 

Edited October 2, 2024 by Viking

[Viking]

A question for board members. When Fairfax takes Peak Achievement private (expected in Q4) will they mark up their 43% stake to reflect the purchase price? If so, this should drive a meaningful realized investment gain in Q4. 

 

Fairfax's carrying value for its 43% position in Peak Achievement is $129 million. At June 30, it had a fair value of $226 million.

 

The sale price for 100% of Peak has not been disclosed. Some reports suggested Peak was being shopped for $800 million. A post on Twitter suggests the final sale price (likely including debt) values the company at $1 billion.

-----------

Fairfax is 'sitting' on about $2 billion in unrealized investment gains today. This figure has been growing rapidly over the past 4 years. As Fairfax harvests this value in the coming years it will be incremental to analysts EPS earnings forecasts.

 

How Fairfax harvest this value will vary. Sometimes it will be an outright sale like Stelco. Other times it will be change in their ownership stake, like Peak Achievement (if I am understanding things correctly).

Edited October 3, 2024 by Viking

[glider3834]

50 minutes ago, Viking said:

When Fairfax takes Peak Achievement private (expected in Q4) will they mark up their 43% stake to reflect the purchase price?

viking yes I would expect so - a gain on consolidation - similar to Gulf Insurance transaction in the sense we are moving from equity associate to controlled sub, but we will need to wait for official confirmation from Fairfax to determine the amount of any potential consolidation gain here with Peak deal.

 

 

 

Edited October 2, 2024 by glider3834

[TwoCitiesCapital]

2 hours ago, glider3834 said:

viking yes I would expect so - a gain on consolidation - similar to Gulf Insurance transaction in the sense we are moving from equity associate to controlled sub, but we will need to wait for official confirmation from Fairfax to determine the amount of any potential consolidation gain here with Peak deal.

 

 

 

 

 This is what I'd expect as well. 

 

A mark up to the value of their offer, the consolidation of gains/losses through the income statement going forward, and a static carrying value on the balance sheet. 

 

[Viking]

Fairfax's total return swap investment (giving it exposure to 1.96m $FFH.TO shares) is up $841m 2024YTD. And up $1.9b (before carrying costs) in 3.75 years. Outstanding capital allocation. Opportunistic. Creative. Concentrated position - a needle mover.

 

How does one calculate the internal rate of return that Fairfax has generated from this investment? Any suggestions?

 

The total return of $1.9 billion in 3.75 years is amazing. But when you compare the return to what it has cost Fairfax to put this position on and keep it on... the internal rate of return from this investment has to be astronomical. 

 

Fairfax's shares are trading at about $1,350/share. If they return 15% over then next 12 months (likely a mildly conservative assumption) that would result in a $200 increase in the share price. That would translate into a $400 million increase (pre-tax) in the value of the FFH-TRS position. A 20% return would result in a gain in the FFH-TRS of $540 million. These are big numbers (larger than the notional value when the position was put on originally). Compounding and time is working its magic.

 

With the shares trading at $1,350, it will be interesting to see if Fairfax continues to be aggressive on the share buyback front. 

 

My guess is holding the FFH-TRS and share buybacks might be linked strategically from a Fairfax perspective. But I am not sure. If Fairfax is confident they will be able to deliver an average ROE of 15% per year over the next 3 or 4 years, perhaps they continue to hold the FFH-TRS position, regardless of what they decide to do with buybacks.

 

This single investment is so instructive about Fairfax on so many different levels. Why it is so different from not only traditional P&C insurance companies, but also how different it is from Markel and Berkshire Hathaway. Unconstrained capital allocation (Fairfax's business model) can be a wonderful compounding machine when executed by the right management team. The FFH-TRS is one of many examples of where the senior team at Fairfax has been executing exceptionally well over the past 6 years or so. 

 

Mr. Market is starting to wake up to the fact that Fairfax has once again become a compounding machine - with its glide path for the next 4 years largely set.  

 

“We think this will be a great investment for Fairfax, perhaps our best yet!” Prem Watsa 2020AR

 

Edited November 4, 2024 by Viking