Fairfax2019

[Sombunall]

Thank you Viking...

 

And c'mon gary17 -- don't be so lazy, convert it yourself! :-)

[Xerxes]

I would just add that Fairfax Financial's ownership in both Recipe Limited + Resolute Forest is accounted through equity method as FFH has a large ownership of both companies. So their stock movement quarter to quarter is not marked to market. But FFH percentage of their equity income is.

 

Unrelated saw this earlier this week on Recipe:

 

https://www.theglobeandmail.com/business/article-prem-watsa-hoped-to-revive-a-restaurant-giant-but-recipe-unlimiteds/

[Viking]

Gary, for Q4 my guess is we will see company wide underwriting come in at 97% CR. Interest and dividend income will be around $215 million. As i indicated above, mark to market gains on equities should be around $160 million. Interest expense will be about $130 million. When i put it all together my guess is BV in q4 should increase $10-$15/share. I try not to get too cute with these estimates; bottom line, i expect Fairfax to post solid earnings and BV growth in Q4. We need a few more quarters like this to get investors interested to get back on the FFH train :-)

 

My range is quite large because Fairfax and its equity holdings have been very active making moves in Q4 and i am not sure when all of these items will be reflected in FFH financials and how each transaction will ultimately impact BV.

 

For example, what i do not understand well is how Fairfax accounts for each of its ‘associates and consolidated’ holdings:

- Seaspan has had quite a run in Q4; will this gain be reflected in BV? If so, how much? (Is it valued at stock price? If so, why is Quess equity accounted?)

- Fairfax India announced two transactions late in Q4 that will increase its BV by about $3 per share; how will this flow though to FFH and timing?

- Quess is carried at a much higher value on the books than its current share price; will we see Fairfax adjust this down? Same with Recipe.

- will the APR transaction be reflected in Q4 results in some way even though it will not close until Q1 2020

- what is value of Digit; will Fairfax show it at a higher value?

 

Other:

- will the Riverstone UK transaction be reflected in Q4 results in some way (higher book value) even though it will not close until Q1 2020. This transaction alone will increase BV by $10 per share.

 

PS: when FFH made their final sale of ICICI Lombard it did not close until Oct but i am pretty sure they booked the gain in Q3 results. This is an example of why i am not sure on the exact timing of when the various announced transactions will be reflected in results :-)

 

[Viking]

I would just add that Fairfax Financial's ownership in both Recipe Limited + Resolute Forest is accounted through equity method as FFH has a large ownership of both companies. So their stock movement quarter to quarter is not marked to market. But FFH percentage of their equity income is.

 

Unrelated saw this earlier this week on Recipe:

 

https://www.theglobeandmail.com/business/article-prem-watsa-hoped-to-revive-a-restaurant-giant-but-recipe-unlimiteds/

 

Xerxes, of Fairfax’s current staple of larger investments it looks to me like Recipe may be in the most difficult situation. Their issues is not Recipe specific; restaurant stocks in Canada are really in a tough position. Here in Vancouver they are being hit with the perfect storm:

1.) big increase in property taxes by the city (8%)

2.) big increases in minimum wage of 6-7% every year for the last 3 years straight (with more big increases already confirmed by the Provincial government)

3.) shift with consumers from eating in restaurant to eating at home (with Skip the Dishes, Uber Eats who take as much as 25% of the order value etc)

4.) steady increase in health care costs

 

What you see across the board is restaurants are unable to increase revenue / cut costs fast enough to offset all the cost increases. 2020 will likely be another tough year for restaurant stocks. The good news for Recipe is the stock has already sold off pretty aggressively in 2019. The question is if we have seen the bottom in profitability or if more bad news is coming in 2020. At some point the sector will be a buy... not sure if we are there yet.

[bizaro86]

I would just add that Fairfax Financial's ownership in both Recipe Limited + Resolute Forest is accounted through equity method as FFH has a large ownership of both companies. So their stock movement quarter to quarter is not marked to market. But FFH percentage of their equity income is.

 

Unrelated saw this earlier this week on Recipe:

 

https://www.theglobeandmail.com/business/article-prem-watsa-hoped-to-revive-a-restaurant-giant-but-recipe-unlimiteds/

 

Xerxes, of Fairfax’s current staple of larger investments it looks to me like Recipe may be in the most difficult situation. Their issues is not Recipe specific; restaurant stocks in Canada are really in a tough position. Here in Vancouver they are being hit with the perfect storm:

1.) big increase in property taxes by the city (8%)

2.) big increases in minimum wage of 6-7% every year for the last 3 years straight (with more big increases already confirmed by the Provincial government)

3.) shift with consumers from eating in restaurant to eating at home (with Skip the Dishes, Uber Eats who take as much as 25% of the order value etc)

4.) steady increase in health care costs

 

What you see across the board is restaurants are unable to increase revenue / cut costs fast enough to offset all the cost increases. 2020 will likely be another tough year for restaurant stocks. The good news for Recipe is the stock has already sold off pretty aggressively in 2019. The question is if we have seen the bottom in profitability or if more bad news is coming in 2020. At some point the sector will be a buy... not sure if we are there yet.

 

(3) is also bad because it hits high margin drink orders. So you get a lower average cheque size with lower margins, plus pay big commissions.

[Xerxes]

3.) January: Seaspan: Fairfax’s additional $250 million investment = 37 million shares purchased at cost of $6.75; with shares currently trading at $14.25 paper gain = $278 million.

- 25 million additional warrants exercisable at $8.10 = paper gain of $154 million

 

 

Top of my head, i recall FFH ownership was around +35-40% based on common stock (not counting warrants). Significant ownership, yet bizarrely one that is being marked to market as oppose to being under equity method.

 

I wonder with APR being folded in and an even larger ownership in common stock, if FFH would need to switch the way it accounts for the newly created Atlas Corp. Said differently, is it more advantageous for them to continue to mark to market (capturing the rising valuation) or capture their portion earnings (which would lag the rising valuation).

 

i understand that the accounting treatment is not done on a whim, but given that FFH public commitment has been a 15% return on equity, and they have been lagging, they do have an incentive to do what they can to capture the "value" into their book value earlier rather (market to market) than later (through equity method earning).   

[Xerxes]

Xerxes, of Fairfax’s current staple of larger investments it looks to me like Recipe may be in the most difficult situation. Their issues is not Recipe specific; restaurant stocks in Canada are really in a tough position. Here in Vancouver they are being hit with the perfect storm:

1.) big increase in property taxes by the city (8%)

2.) big increases in minimum wage of 6-7% every year for the last 3 years straight (with more big increases already confirmed by the Provincial government)

3.) shift with consumers from eating in restaurant to eating at home (with Skip the Dishes, Uber Eats who take as much as 25% of the order value etc)

4.) steady increase in health care costs

 

What you see across the board is restaurants are unable to increase revenue / cut costs fast enough to offset all the cost increases. 2020 will likely be another tough year for restaurant stocks. The good news for Recipe is the stock has already sold off pretty aggressively in 2019. The question is if we have seen the bottom in profitability or if more bad news is coming in 2020. At some point the sector will be a buy... not sure if we are there yet.

 

i am glad i do not own Recipe but glad that i own it diluted through FFH.

 

And i can definitely see some of the MTY owned entities (Thai Express, Arahova) more or less empty all the time. yet, Allo-mon-coco, the breakfast joint, also owned by MTY is PACKED !!!!

i think for sit-ins the shift is really toward breakfast places.

 

On Recipe side, the only one that i care to use is The Keg + Harveys now and then.