Fairfax Africa

[FairFacts]

Changes at the top at Atlas Mara.....

 

https://www.bloomberg.com/news/videos/2019-02-06/bob-diamond-steps-down-as-atlas-executive-chairman-video

 

More details here and their relevance to Fairfax

 

https://www.dailymail.co.uk/money/markets/article-6673811/Former-Barclays-boss-Bob-Diamond-gives-chairmanship-African-venture-Atlas-Mara.html?ns_mchannel=rss&ns_campaign=1490&ito=1490

[wondering]

thanks for posting.

 

the Daily Mail article mentioned that Fairfax Africa had an investment in GroCapital Holdings.  I thought I was following FAH pretty closely, but I guess not because I have never heard of this GroCapital investment.

[FairFacts]

Wondering,

 

See www.GroCapitalHoldings.com at the bottom of their home page which shows the corporate structure including Fairfax Holdings  and Fairfax Africa.

 

Ihave edited the link to the correct one, thanks Petec.

[petec]

I think you meant this link: http://grocapitalholdings.com/

 

By the looks of it it might have been part of AFGRI, which might be why you don't know of it separately. It's the holding company for the South African Bank of Athens, bought from National Bank of Greece last year.

[wondering]

Ok. Thanks.

 

I am little surprised that this announcement did not appear on the FAH website.  I would think that the additional role that Michael Wilkerson is taking on (CEO of Atlas Mara) would warrant a press release.

 

By the way, FAH made a $51m investment in Consolidated Infrastructure Group last month.  I am glad to see they are putting their cash to use (I just hope it was a good purchase ;)

[petec]

By the way, FAH made a $51m investment in Consolidated Infrastructure Group last month.  I am glad to see they are putting their cash to use (I just hope it was a good purchase ;)

 

There’s a lot of good info on CIG on their website. Only glitch I can see is investors didn’t exercise their rights, but it would have been a non-event/disappointing for FAH if they had. At first glance FAH have bought half the company at a big discount to book, and it was healthily profitable before one of the divisions got into trouble.

 

Edit: not such a big discount to book; didn’t see how much they lost in 2018!

[petec]

My notes on the recent CIG deal, if anyone's interested:

 

FAH agreed to recap CIG in 2018/2019 in three stages: a $21m loan (2.5% fee, prime+4%, 1 year), $51m in a rights issue at R4/sh (underwritten by FAH for 2.5% fee. Uptake was only 10.5% because the share price was below the offer price, so FAH got most of the shares which I imagine was the intention), and then conversion of the loan into equity at R5.20. After the conversion FAH will have 56% of the stock at an average price of R4.14. As of Feb 2019 CIG trades at R3.10 but the company's own SOTP (p17 here: http://www.ciglimited.co.za/wp-content/uploads/2018/08/Project-Wakanda-Shareholder-meeting-re-convert_13August2018_vF.pdf), which looks reasonably conservative at first glance, says it's worth R7.10. CIG is a pan-African diversified energy infrastructure holding company exposed to growing investment in power generation & grids etc. The problem is that the construction arm got into classic construction trouble with cost overruns etc. This caused the holdco to breach covenants on its long term debt, triggering a holders call clause and the need for a rights issue. There seems to be value in the other subsidiaries, so with a better debt structure this opportunity might never have arisen. The major assets are Conco and Conlog. Conco builds substations and high voltage electrification projects including wind parks and solar farms across Africa and the Middle East. This is the business that got the holdco into trouble. It has been restructured and reorganised to improve execution and project selection, management have been given CFops incentives for the next 3 years, and CIG believes it will return to profitability over the next 12-18 months. Conlog makes prepaid and smart electric meters. These can be sold or leased or bundled as a service (e.g. revenue management and load management for utilities and municipalities). Conlog will receive an equity injection to accelerate the buildout of the lease/service annuity streams at an anticipated 20-25% ROE. Other assets include AES (Angola Environmental Services - does waste disposal for the oil and gas industry in Angola, debt free), CIGenCo (develops mid-sized generation projects, made its first profit in 2018, targets a 20-25% ROE, and has 6 out of 14 projects coming online soon), CPM (maintains renewables and transmission sites), Tractionel (electrifies railways), and CBM (Consolidated Building Materials, consisting of Drift Supersand which mines aggregates and West End Claybrick which manufactures clay bricks and concrete roof tiles). A number of these businesses are currently depressed either due to the oil price (Angola rig count is at historic lows) or the South African economy (construction has been in a recession for some time).

 

In summary FAH seem to have got reasonable value, there's a clear reason why that opportunity existed, and there's a decent platform for future growth.

 

[wondering]

Thanks for posting.

 

I have buying more FAH as the price is below initial issue price and book value.  I know that the South African zand took a beating against the US dollar, but the zand has recovered somewhat since the summer.

[wondering]

https://www.fairfaxafrica.ca/News/Press-Releases/Press-Release-Details/2019/Fairfax-Africa-Appoints-Lieutenant-General-Romo-Dallaire-to-Its-Board-of-Directors/default.aspx

 

[elliott]

Is the FAH team investing in some businesses which maybe in too much of a distressed situation? Is this typical Fairfax (parent company) behaviour? (I dont know much of FFH, and started looking at FAH only a couple of weeks ago).

 

Atlas Mara. I would not consider Atlas Mara to be in a distressed situation ar they have been and are generating positive earnings (even if somewhat inflated with "gains" on transactions), but it would seem that the company overreached and capital needs arised, thats why they had to call FAH. Share price has dropped 50% since Fairfax made their biggest purchase (the rights offering).

CIG. This company is clearly going through some tough years, financially and operationally (like South Africa!). FAH has provided some much needed capital but still. Share price has dropped 75% since FAH made its biggest purchase (the rights offering).

Undisclosed infrastructure stock, traded in the JSE. A USD 3M position initiated during 2018 than less than a year later has lost ca 90% of its value. It was either a case of fraud or a case of a company in distress.

 

I do not pretend to be negative with management here. I actually think they are doing some serious work, and like what I read in the reports, but the short term performance of, at least, the publicly traded stocks is appalling.

 

 

 

 

[petec]

Is the FAH team investing in some businesses which maybe in too much of a distressed situation? Is this typical Fairfax (parent company) behaviour? (I dont know much of FFH, and started looking at FAH only a couple of weeks ago).

 

Atlas Mara. I would not consider Atlas Mara to be in a distressed situation ar they have been and are generating positive earnings (even if somewhat inflated with "gains" on transactions), but it would seem that the company overreached and capital needs arised, thats why they had to call FAH. Share price has dropped 50% since Fairfax made their biggest purchase (the rights offering).

CIG. This company is clearly going through some tough years, financially and operationally (like South Africa!). FAH has provided some much needed capital but still. Share price has dropped 75% since FAH made its biggest purchase (the rights offering).

Undisclosed infrastructure stock, traded in the JSE. A USD 3M position initiated during 2018 than less than a year later has lost ca 90% of its value. It was either a case of fraud or a case of a company in distress.

 

I do not pretend to be negative with management here. I actually think they are doing some serious work, and like what I read in the reports, but the short term performance of, at least, the publicly traded stocks is appalling.

 

Fairfax (as in the parent) are value investors with a long history of low p/bv and arguably distressed investing. Sometimes it's worked, sometimes it hasn't.

 

In fairness to them they also have a history of attracting very good people to build impressive businesses over the long run, and one thing I'd pay attention to is who they've hired or appointed to the board of their companies since taking control.

 

Another thing I think will be intriguing long term is the ability to share knowledge across group companies. They've mentioned doing this in agriculture (where they have assets in Canada, Ukraine, Africa, and India) and digital insurance. I suspect it will also happen in banking now they control ATMA and Catholic Syrian.

 

In ATMA's case the value is fairly apparent since it trades at a big discount to the value of the three listed stakes it owns (I'm including EGH, although that deal has not yet closed). It has been buying back shares steadily in 2019. FAH have taken over the chairmanship of the board and also appointed Richie Boucher (who led the turnaround of BKIR which Fairfax was heavily involved in, and who sits on the board of Eurobank, another Fairfax investment) and Hisham Ezz al-Arab (MD of CIB in Egypt, a phenomenal bank and also a Fairfax investment).

 

CIG has several segments. Only one is distressed. Others are variously at the bottom of their cycles, or about to move from an investment phase into a harvesting phase, or have huge potential with a bit of growth capex. The distressed one is the E&C business and its problems provided with Fairfax with the opportunity to control the whole firm at a decent price. They've already revamped management and last I heard the turnaround was on track although I haven't looked for a couple of months. My sense is that CIG will do well, but I could be wrong.

 

I suspect the best business in FAH, although it's a small stake, is Nova Pioneer.

 

One thing I personally wouldn't pay a lot of attention to is short term market moves. Fairfax tend to take advantage of distress when they see it rather than try to time the bottom.

 

FD: I hold FFH, FAH, and FIH. I am a fan of the group, but they have made plenty of mistakes. If you buy this go in with your eyes open.

 

EDIT: Hisham Ezz al-Arab left the ATMA board when FAH revamped it in Feb 2019, but he is on the board of FAH itself.

 

 

[elliott]

Thanks for the reply, it provides some useful background.

I will try to read about the people in the team, specially Wilkerson, and also Pectorum.

 

One note though regarding Atlas Mara. According to my numbers, its trading at less of a discount than what most financial websites report, ex morningstar. First, is that I prefer to use PTBV. Second, Atlas Mara has UBN recorded at USD 530M approximately, when the fair value of their interest is worth much less, USD 300M (a little below the actual equity owned through that ownership - UBN trades slightly below BV). So, morningstar reports a 0.45 PBV, my numbers are close to 0.8 PTBV. Its still a figure that would be typically considered cheap, though.

[petec]

I agree, but to be clear I wasn’t referring to book value. I was referring to the value of the listed stakes in UBN, ABCBotswana, and (soon) Equity Group Holdings.

[elliott]

My mistake!

 

it trades at a big discount to the value of the three listed stakes it owns

 

I assume then that you are talking here about Atlas Mara market cap and that of its stakes?

Atlas Mara, USD ~250M

Stakes, USD ~495M composed of

[*]UBN (49% interest), USD ~280M

[*]BancABC Botswana (80% interest), USD ~110M

[*]Equity Bank Group, USD ~105M (Atlas Mara is suppose to receive as many shares as can be purchased for ~105M)

I wonder however if we can make this comparison. Atlas Mara took on some debt in order to fund some of those acquisitions. That is, there is debt in Atlas Mara balance sheet that is not part of the normal banking business. What I am thinking is that if we want to compare what we get if we buy Atlas Mara against something that something has to be the cost of acquiring Atlas Mara, and that includes Market cap and that portion of the debt, which amount I dont know.

 

Btw, nice conversation about FAH here!

 

[petec]

You’re right it’s a risk. The remaining unlisted asset is ABCZimbabwe. Any debt not associated with that is holdco debt and needs to be factored against the assets. Same goes for holdco costs. Those aren’t easy to break out (although it may become easier once the EGH deal is done) so it’s not a perfect valuation method. But I’ll be surprised if the holdco debt and costs account for the whole difference.

 

Mind you if you think ATMA is cheap you can just buy it. The reason I’m in FAH is a) I like the concept of investing in places with great potential where others aren’t looking and b) on balance I think Fairfax’s record, although far from perfect, of building and turning around businesses will play out well over time.

[elliott]

I should continue researching Atlas Mara, although I am more interested in FAH at this moment (Atlas Mara is how I discovered Fairfax Africa, actually). I like very much how they play their thesis - they are much more sophisticated than me just purchasing some shares.

There are several points I need to address regarding FAH, though.

 

The African thesis Probably, the growth/demographics/political improvements argument could have been made several times during the last few decades, and I am not sure how the bet would have played out. Farnam Street has invested in FAH recently, and they argued that Africa could replicate the growth Asia has achieved in the last 50 years. Yeah, the problem is, why did Africa not achieve such growth already? Undoubtedly, some regions in Africa have achieved extraodinary accomplishments, but... I simply think Asia has improved much more, so I dont know why the next 50 years should be different (and I really hope they are).

 

Comparables. Farnam Street did not mention having compared the company against similars, which is unfortunate as it would have given us some names. At least, I think I need to read about similar firms to help me better understand FAH. If I cannot find any, then I need to look for actively managed funds investing in Africa.

 

Fairfax positive bias FAH is backed by Fairfax, but it is not Fairfax (or is it?). I am not sure how it is at the present moment, but at IPO time all of the companys executive directors, including the CEO, were based outside of Africa. They sure make some trips but... The only ones in the region were independents. HWIC is not in Africa either... So, regardless of their past experiences, this leaves only Pactorum permanently in the region. It makes me think that Pactorum is probably the biggest originatior of ideas, and the main researcher too (afgri and nova, both were investments that agrigroupe, the seed/precendent of Pactorum, had already made before FAH had even been born). So I wonder, if Pactorum had set up a fund, without the Fairfax brand attached, how would I see them?

 

Conflicts of interest This expression may be misleading though. I am not talking about HWIC first telling about an invesment to FFH instead of FAH, or things like that. I am thinking of situations like the "initial investment", AFGRI. It was not just FFH that sold its stake to FAH. Wilkerson, Holzapfel, and other members of the team sold part of their AFGRI stakes to the company, when they had purchased AFGRI only 3 years earlier or so. It is not that I think there was something fishy there, it is just that it is hard for me to believe that they would have sold at a loss even if an objective valuation at the moment would have been lower than the price they initially paid for AFGRI. And I dont like that. I could be wrong here, though, as the whole transaction is rather convoluted (the company indicated there was a conflict of interest in the prospectus). Also, Chris Venter, CEO of AGH/Afgri holdings, is a director in one of FAHs internal companies. I wonder the CEO of an acquired compoany should be director somwhere in the "structure" of FAH. Surely he has a competent background, but...

[John Hjorth]

... The reason I’m in FAH is a) I like the concept of investing in places with great potential where others aren’t looking and b) on balance I think Fairfax’s record, although far from perfect, of building and turning around businesses will play out well over time.

 

elliott,

 

I think both Fairfax Africa Holdings Corp. and Fairfax India Holdings Corp. are two Fairfax investments, that both have the potential to become repetitions of the original long term Fairfax story itself - which - long term - is an amazing one. If that actually happens - perhaps over the next one or two decades - it would be transformational to Fairfax itself, being big contributers to bringing Fairfax to the next level. There is an enormous abundance of capital some other places, and there is so much to do both places [Africa & India].

 

However for this really to work out, the companies need to get it right in the first place, to build a good track record - to be able to attract new capital to grow, thereby creating a fly-wheel effect.

 

- - - o 0 o - - -

 

Atlas Mara : "Why Africa?". [Old stuff from the 2014 Annual Report that you may have read already because you already have studied Atlas Mara - I personally think this still applies to great extent].

IMF - World Economic and Financial Surveys - Regional Economic Outlook - Sub-Saharan Africa - Sub-Saharan Africa Regional Economic Outlook: Recovery Amid Elevated Uncertainty [April 2019].

 

- - - o 0 o - - -

 

elliott, I seldom post in the Fairfax part of CoBF. FFH is a fairly small position for me, now for some years actually. I have no intentions to reduce or sell my position, exactly because of Fairfax India Holdings and Fairfax Africa Holdings. I just try to shut up and learn more about FFH by avid reading FFH stuff here on CoBF. Well, here I failed on that - I hope that at least one of the links is of avail to you.

[hobbit]

If you go thrugh the annual reports , the original thesis for ATMA was to turn around bank's fortunes by getting a new CEO . In less than 1.5 years it changed to selling almost all the assets( excluding BancABC) at a price( ~100 million )  which is probably way below their intrinsic value. This makes me question the ability of FAH management to find good bets in Africa in general. FAH management has to be more open about this sudden change in strategy regarding their biggest position.

[petec]

If you go thrugh the annual reports , the original thesis for ATMA was to turn around bank's fortunes by getting a new CEO . In less than 1.5 years it changed to selling almost all the assets( excluding BancABC) at a price( ~100 million )  which is probably way below their intrinsic value. This makes me question the ability of FAH management to find good bets in Africa in general. FAH management has to be more open about this sudden change in strategy regarding their biggest position.

 

On the other hand if you get in a new CEO and he says: the best way to realise value is to reinvest heavily in this asset (UBN) while swapping these ones for a stake in one of Africa's best banks (EGH), should you argue?

 

More importantly, Fairfax have a long history of being highly active in the investments they own. Sometimes it works, sometimes it doesn't, but changing strategy is definitely not new to them. If sticking to the initial strategy is what you require, look elsewhere!

 

ATMA keeps weakening and on the face of it there is real value there. Company is in the market buying back shares every day.

[elliott]

Bought shares a couple of days ago. The discount to BV, with public investments updated, will make up for a few years of fees I think.

 

I may also buy Atlas Mara shares, if the price drops to below the minimum of a few days ago. The company has been profitable even when it has not been operating at its best. If Wilkerson's push for cutting costs down has any real impact, and the new strategic direction (divestitures, new investments) pays off, then earnings will only rise.

 

[elliott]

Third quarter interim report is now available in FAH website.

 

The book value per share at September 30, 2019 was $8.54 compared to $9.60 at December 31, 2018

 

I have recalculated the BVPS using updated market data (public stocks). Almost no change at all from the reported figure above. Shares closed yesterday at USD 5.90

 

There might be several reasons for the discount:

• the fees
  
• the dismal performance of the public stock investments
  
• the uncertainty related to the valuation of the private equity investments
  

 

In the first 9 months of the year the company has bought back and cancelled close to 5% of total outstanding shares at the end of fiscal year 2018.

[petec]

Updated valuation attached. My conclusions are:

 

- Valuation is 0.7x P/BV or 0.6x if you value ATMA at TBV.

- The holdco is hugely underlevered, with $170m of cash and only $8m of liability.

- ATMA is clearly undervalued and Nova Pioneer is exciting but neither really moves the needle.

- The rest is stodge: cash, loans with little upside optionality, and AGH, which hasn't performed in years.

- I don't really see where the performance comes from, at least until they have deployed more capital, and frankly their record on that isn't great.

FAH.emf

[hobbit]

https://taarifa.rw/analysis-what-does-the-flopped-equity-bank-atlas-mara-deal-mean/

[elliott]

...not to mention that last november Equitys stock went up 50%. meaning, the 6-7% stake that Atlas Mara was to receive is much more valuable now than when the deal was initially disclosed - if my memory doest no fail. I wonder how the parties will deal with this.

 

[hobbit]

At $4.35 per share , common stocks worth 232 mil are being marked at zero and on top of that ATMA is trading at less than its stake in UBN which has been posting good results. can easily double from here