Fairfax 2023

[Viking]

1 hour ago, wondering said:

Hi Viking,

I agree with your overall thesis for FFH, however could you expand on your argument why commercial real estate is the next asset class to go down.

@wondering i think there are segments within ‘commercial’, like office, that could really struggle moving forward. i am no expert   Blockworks has a second YouTube video out today on commercial real estate that i have not listened to yet.
 

 

[Viking]

In the 'Fairfax Stock Positions' thread, I estimated Fairfax's equity portfolio is up about $680 million in Q1. About $375 million is mark-to-market = $16/share pre-tax. What about Fairfax's bond portfolio? I am thinking we might see Fairfax post a sizeable unrealized gain in the bond portfolio in Q1.

 

Why? Bond yields, further out on the curve (3 to 5 year) are down about 40 basis points in Q1 (Dec 31 compared to March 31) and we know Fairfax was buying bonds of this duration in 2022. And this likely continued in Jan and Feb of 2023 as interest rates spiked. 

 

How big will the unrealized gain be? I am not sure. $100 million? $200 million? I know other posters on the board have a much better handle on this than i do... please feel free to chime in with your thoughts.

 

 

----------

Here is what the company had to say about interest rate risk in the 2022 AR (page 106). The change in sensitivity to rising and declining interest rates increased materially in one year.

 

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Below is the fixed income maturity profile for Fairfax (page 63 of AR). About $20 billion of Fairfax's total $30 billion fixed income portfolio will be marked at a lower interest rate March 31 (compared to Dec 31). An offset will be the impact of slightly higher interest rates on the $9 billion that is due on 1 year or less. 

 

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I am looking at this largely through the lens of US Treasuries. Fairfax's bond portfolio is pretty diverse with Foreign government bonds, corporates etc. My analysis and thinking above is very top line and more directional than anything. It is not meant to be precise.

 

Fairfax has also said repeatedly they expect the $1 billion in unrealized bond losses that were reported in 2022 to largely reverse over the near term. This should also be a tailwind in 2023, especially if we see interest rates head lower.

Edited April 1, 2023 by Viking

[Viking]

With the quarter coming to a close, my guess is Fairfax will earn about $37/share in Q1. That would put March 31 book value at US$685 = $658 + $37 - $10 div. Shares are trading today at $665 = 0.97 x BV.

 

Fairfax also will see about a $300 million gain in the market value of its associate common stock holdings (equity accounted) in Q1. This will put the market value of associate holdings at about $575 million over carrying value (about $25/share pre-tax). This is not captured in book value.

 

I am assuming the sale of Ambridge did not happened in Q1. When this sale closes, likely in Q2, Fairfax will book a $275 million pre-tax gain (about $10/share after tax).

 

Fairfax also telegraphed that reported BV will be increasing as a result of shifting to IFRS-17 reporting when they release Q1 results - due to how currently elevated interest rates are accounted. Fairfax said the increase in BV will be 'material'... not sure what that means (in terms of how much).

 

I am not expecting much in the way of share buybacks in Q1. The dividend is paid in Q1 and this is about a $250 million use of cash (common and preferred). Fairfax is now generating significant cash flow in underwriting profit and interest and dividend income each quarter (est $700 million in Q1). The sale of Resolute for $625 million also closed in Q1. The sale of Ambridge will bring in more ($275 million cash and $125 million promissory note). It will be interesting to see what Fairfax does with the all the cash.

 

When I weave it all together: Fairfax looks poised to report a very good Q1. More importantly, 'the story' at Fairfax continues to get better.

 

Shares continue to look cheap. My current estimate is Fairfax will earn about $122/share in 2023 = P/E of 5.5 ($665/$122). My 2023 year-end BV estimate is $770 = forward P/BV multiple = 0.86 

 

 

Assumptions:

1.) underwriting profit = $330 million = flat to PY. My guess is net premiums earned will come in +10% to PY. CR will be a little higher than 2022 (when it was a stellar 93.1). 

2.) interest and dividends = $350 million. Q4 2022 came in at $314 million. Fairfax said current run rate is $1.5 billion per year.

3.) share of profit of associates = $200 million. Slightly higher than PY.

4.) life ins & run-off = - $25 million. A little more than PY.

5.) other (revenue - expenses) = $50 million. Expect increase in ownership of Recipe to start to move the needle here in 2023.

6.) interest expense  = $125 million. Same as Q4, 2022.

7.) corporate overhead = - $80 million. Same as PY. (no idea)

8.) net gains = $500 million. Equity gains = $375-$400 and bond gains = $100-$150 million. Mostly unrealized. 

9.) income taxes = - $228 million. 19%? Guess.

10.) non-controlling interest = $110 million? Guess.

Edited April 2, 2023 by Viking

[NormR]

People going to the FFH AGM should check out Fairfax Lollapalooza 2023

 

Those who aren't COBF members can read the public version instead.

[giulio]

Watsa on Greece, Eurobank, US banking Crisis and inflation 

 

https://knews.kathimerini.com.cy/en/business/prem-watsa-greek-banks-are-safer

[Parsad]

2 hours ago, giulio said:

Watsa on Greece, Eurobank, US banking Crisis and inflation 

 

https://knews.kathimerini.com.cy/en/business/prem-watsa-greek-banks-are-safer

 

Good interview!  Cheers!

[Read the Footnotes]

On 4/2/2023 at 5:20 PM, NormR said:

People going to the FFH AGM should check out Fairfax Lollapalooza 2023

 

Those who aren't COBF members can read the public version instead.

Thank you Norm for maintaining both of these webpages.

 

The Fairfax 2023 page is already up to 19 pages after three months. I am sure this is a year there will lots of happy shareholders who are looking forward to attending who will appreciate your efforts, including your involvement with these two out of the many events:

 

April 18 (Tuesday)

The Early Bird
Time: 5 PM start. We'll probably order dinner around 6 PM and be there until 10:30 PM or so.
Restaurant: C'est What
Location: 67 Front St E, Toronto, ON M5E 1B5 (a 10 minute walk east from the Royal York Hotel)
Google Map: Walking along Front Street is the easiest
Reservations are not needed. So, drop by, ask for Norm, and say hi.

April 19 (Wednesday)

The Ben Graham Dinner
Time: 7:45 PM to late
Location: The Keg, with details via the RSVP
Info: RSVP Required

Edited April 4, 2023 by Read the Footnotes

[Candyman1]

Anyone worried for FFH about the risk of large floods out west due to coming melt off. I live near the mountains and man is there a lot of snow currently. Not sure if FFH has a lot of exposure. I remember a smaller snow year, but it stayed colder than normal for longer, like this year, and suddenly the temps shot up into the 70s and just those few days took out a number of bridges. Similar thing might happen now on much larger scale.

[Crip1]

1 hour ago, Candyman1 said:

Anyone worried for FFH about the risk of large floods out west due to coming melt off. I live near the mountains and man is there a lot of snow currently. Not sure if FFH has a lot of exposure. I remember a smaller snow year, but it stayed colder than normal for longer, like this year, and suddenly the temps shot up into the 70s and just those few days took out a number of bridges. Similar thing might happen now on much larger scale.

Same for the upper midwest as the snowpack is higher than average. Can't recall the year but a few decades ago we had a similar situation. Once spring arrived, heavy rains were exacerbated by snow-melt runoff which caused a boatload of river flooding. 

 

That said, I've no idea the level of FFH's exposure to this.

 

-Crip

[Viking]

On 3/15/2023 at 6:53 AM, giulio said:

Here is what I found most interesting reading FFH 2022 annual report:

• Ki had a CR of 99% and received a $152M investment from a third-party investor

  • gross premiums written of $834 million in only its second year of operation

  • IIRC Brit has 20% economic interest in Ki; curious to know what the plans are for Ki and why Brit opted for only a 20% interest

  • Interestingly, Ki and Digit writes similar level of premiums; of course, prospects are materially different, I wonder what Ki valuation might be

• consolidated investments' 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

  • Management guidance: 15% on 2.1B BV (this is what I understand from Watsa's letters)

  • Nice to see a table on consolidated companies' EBITDA, interest expense, D&A and pre-tax income (page 208)

  • Markel ventures in 2022 = revenues of $4.8 billion, record EBITDA of $506 million

• 

  • Reserves development has not been so "favourable" since 2017: 3 years of losses, an improvement in the last 2 years, but a major "help" was from FX

  • Maybe this will improve as past acquisitions are digested and a better underwriting discipline prevails

• Future allocation -> I think FFH will spend roughly $2.3B repurchasing minority interests in its insurance companies (excluding dividends). I think these deals, similar to Eurolife's, have a fixed price (i.e. a call option). In 2022 FFH paid $650M for 12% of Allied (650M cash + value of the option + dividend accrued = 733.5M as reported); based on these numbers, I estimate FFH will pay another $930M for the remaining 17.1%, for a total of approximately $1.6B (what co-investors invested in 2016). Add to this $900M related to Odyssey and $375M for Brit.

  • FFH has the option to purchase the remaining interests of the minority shareholders

    • in Allied World at certain dates until September 2024

    • in Brit at certain dates commencing in October 2023

    • in Odyssey Group at certain dates commencing in January 2025

  • As a side note: FFH essentially uses OMERS et alius as debt providers, paying them dividends (interests) at a 7-8% rate

• Insurance market: "Favourable underwriting conditions are expected to continue into 2023, albeit more modestly after very healthy rate increases in both 2021 and 2022"

  • don't expect 15%+ growth in 2023

• Unless...

  • "if interest rates remain higher for longer, the unrealized investment losses will take many years to unwind and could prolong the hard market for a few years

  • The reinsurance sector continued (...) to achieve significant rate increases. Following the landfall of Hurricane Ian, in 2023 the reinsurance market sustained its most challenging January 1st renewal season since 2001, following the 9/11 attacks

• float increased by $3,393.1 to $31,230.0 (12% growth)

• I highlighted a couple of lines on the company strong culture which I believe is underestimated and not  enough appreciated as a competitive advantage (20 years of service for officers...these people want to stay and grow within Fairfax, it must be good!)

Very happy to receive comments and discuss if I missed something or if there are errors in what I wrote!

 

Thanks,

G

@giulio nice summary. I think we might see Fairfax continue to take out minority interests in 2023. Your summary of the cost of doing so was helpful. It will be fun to watch what they do with all the free cash flow they are generating. 

[Viking]

What is Prem’s ownership position in Fairfax today?

• 10% economic interest valued at $1.52 billion ($650/share on April 6).
• 43.9% voting interest.

What does the mean? Prem is firmly in control of Fairfax.

 

Two of his children serve on the board: Christine McLean and Ben Watsa.

 

 

—————

How much does Prem get paid by Fairfax?

 

1.) Salary: $600,000/year.

this salary has stayed the same for decades

2.) Stock-based compensation: unlike other executives at Fairfax, Prem does not earn any stock based compensation.

 

For companies of Fairfax’s size this is a pretty unique compensation package. And looking t it strictly from a compensation perspective, this is a smoking hot deal for shareholders.

—————

On June 15, 2020, Prem Watsa announced he had purchased 482,600 shares of Fairfax at a total cost of $148.95 or $308.64/share. With shares closing on April 7, 2023 at $650, Prem has made a paper gain of $165 million = + 110%.  Not too shabby over 34 months. Prem is a value investor and he certainly nailed this purchase. The significant size of the purchase was surprising, given how much Fairfax stock he already owned.

 

Fairfax shares bottomed out at $250 in May of 2020. Of interest, book value bottomed out at $442/share at March 31, 2020. The share price dropped to the $260 level in October of 2020. Shares were trading at prices last seen in 2007. For long term investors in Fairfax these were the darkest of days. Many capitulated and sold their shares. The sentiment index in Fairfax was flashing ‘extreme fear’.

—————

Prem Watsa Acquires Additional Shares of Fairfax

- https://www.fairfax.ca/news/press-releases/press-release-details/2020/Prem-Watsa-Acquires-Additional-Shares-of-Fairfax/default.aspx

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

[Parsad]

5 hours ago, Viking said:

What is Prem’s ownership position in Fairfax today?

• 10% economic interest valued at $1.52 billion ($650/share on April 6).
• 43.9% voting interest.

What does the mean? Prem is firmly in control of Fairfax.

 

Two of his children serve on the board: Christine McLean and Ben Watsa.

 

 

—————

How much does Prem get paid by Fairfax?

 

1.) Salary: $600,000/year.

this salary has stayed the same for decades

2.) Stock-based compensation: unlike other executives at Fairfax, Prem does not earn any stock based compensation.

 

For companies of Fairfax’s size this is a pretty unique compensation package. And looking t it strictly from a compensation perspective, this is a smoking hot deal for shareholders.

—————

On June 15, 2020, Prem Watsa announced he had purchased 482,600 shares of Fairfax at a total cost of $148.95 or $308.64/share. With shares closing on April 7, 2023 at $650, Prem has made a paper gain of $165 million = + 110%.  Not too shabby over 34 months. Prem is a value investor and he certainly nailed this purchase. The significant size of the purchase was surprising, given how much Fairfax stock he already owned.

 

Fairfax shares bottomed out at $250 in May of 2020. Of interest, book value bottomed out at $442/share at March 31, 2020. The share price dropped to the $260 level in October of 2020. Shares were trading at prices last seen in 2007. For long term investors in Fairfax these were the darkest of days. Many capitulated and sold their shares. The sentiment index in Fairfax was flashing ‘extreme fear’.

—————

Prem Watsa Acquires Additional Shares of Fairfax

- https://www.fairfax.ca/news/press-releases/press-release-details/2020/Prem-Watsa-Acquires-Additional-Shares-of-Fairfax/default.aspx

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

 

He truly eats his own cooking!  He's also one of the best corporate leaders I've ever seen...warts and all that some people like to point out.  Cheers!

[Viking]

I continue to believe that Fairfax is a misunderstood company. With an increase of 90% in its price over the past 27 months, yes, the stock is up significantly. 

 

 

After such a big move, surely the stock is now fairly valued, and probably even overvalued. Right? Wrong. I think the stock remains dirt cheap. 

 

How can this be?

1.) the stock got historically cheap in 2020 - the starting point matters, and this was a very low starting point.

2.) despite significant mis-steps over the past 13 years, Fairfax has been executing well, especially over the past 5 years:

- Insurance: Fairfax has quietly grown into a well run top 20 global P&C insurer.

- Investments: Fairfax has a $38 billion fixed income portfolio that is likely best-in-class positioned for the current interest rate environment. Its $16 billion equity portfolio has improved in quality in recent years and has held up up well in the current bear market.

 

So we have this wickedly good set up today where Fairfax, the company, has been firing on all cylinders and delivering very good results for a few years. And it is poised to continue this strong performance over the near term. And yet the stock remains very cheap. 

 

So what is the disconnect? I see two:

- The primary tool investors use to value insurance companies, book value, is understated for Fairfax. Perhaps significantly so. 

- Investor sentiment (the multiple), while improving, is still near historically low levels. 

 

I think most people can understand why sentiment is poor. But how can book value be understated? I will try and explain my thinking in more detail in my next post (in another day or two). 

—————

What is Fairfax’s current valuation?

 

My guess is Fairfax should be able to earn US$120/share in 2023 ($37/share in Q1) and another $120/share in 2024. I don’t think these are particularly aggressive estimates. 

 

This would result in Fairfax delivering an 18% ROE in 2023. The stock is currently trading at:

- 1 x trailing BV (Dec 31, 2022) and 0.85 x forward BV (Dec 31, 2023)

- 5.5 x est 2023 earnings

 

On either valuation metric, P/BV or PE, Fairfax’s stock price looks very cheap, especially when compared to an expected 18% ROE. 
 

 

Edited April 12, 2023 by Viking

[Viking]

Book value is one of the core measures used by investors and analysts to value an insurance company. The rule of thumb is a P&C insurer is cheap when trading at a P/BV approaching 1 and it is expensive when trading at a P/BV approaching 2. Book value is an easy, and blunt, instrument. But it is what most people usually use as their 'north star'. 

 

How To Value An Insurance Company

• https://www.investopedia.com/articles/investing/082813/how-value-insurance-company.asp

In 2019, in a shocker of a move, Buffett abandoned using book value as a measure for investors to use to value Berkshire Hathaway.

—————

After 54 years, Warren Buffett abandons a valuation measure that gained 1,091,899% for Berkshire Hathaway shareholders

• https://ca.finance.yahoo.com/news/warren-buffett-abandons-book-value-154954927.html

 

For Buffett, book value no longer provides the value that it once did for shareholders trying to understand Berkshire’s business for three key reasons.

 

“First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses,” Buffett writes. “Charlie and I expect that reshaping to continue in an irregular manner.

 

“Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mis-mark that has grown in recent years.

 

“Third, it is likely that — over time — Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.”

—————

Book Value: a couple of definitions:

• The book value of a company is the net difference between that company’s total assets and total liabilities, where book value reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated.
• Common shareholders get whatever is left over after the corporation pays its creditors, preferred shareholders and the tax man.
• In simplified terms, it's also the original value of the common stock issued plus retained earnings, minus dividends and stock buybacks.
• Keep in mind that book value and BVPS do not consider the future prospects of the firm - they are only snapshots of the common equity claim at any given point in time.
• https://www.investopedia.com/terms/b/bookvalue.asp

—————

So what does this have to do with Fairfax?

 

I am wondering if book value has become a pretty poor measure to use today to value Fairfax. For three reasons:

1.) over the past 13 years, earnings at Fairfax have been ‘scrambled’ repeatedly by a number of ‘one-time’ events (big losses). This resulted in low retained earnings for most of the past 13 years which in turn has stunted growth in common shareholders equity/book value.

2.) the causes of the ‘big losses’ largely no longer exist; that is why I referred to them as 'one-time' events. Future earnings will be higher and will increase retained earnings and grow common shareholders equity/book value.

3.) future prospects (which book value does not consider) for Fairfax have rarely looked better: insurance, fixed income investments and equity investments are all poised to perform at a high level all at the same time.

Edited April 12, 2023 by Viking

[Viking]

Below is a 13 year history of a few key metrics for Fairfax. What are the key take-aways?

 

1.) Fairfax's most important business, insurance, has grown 420% (350%/share). This is a crazy amount of growth. And has vaulted Fairfax into the top 20 of global P&C insurers.

2.) Fairfax's second most important business, investments, has grown 160% (125%/share). Not as impressive as the growth in the insurance business, but solid.

 

What is the math? Let's assume a 95CR and a 6% return on investments:

•         underwriting + investments = total (millions)
• 2009         $214   +    $1,276    =   $1,491                 =  $75/share
• 2022        $1,114   +   $3,329   =   $4,442  +200%  = $190/share  +156%

3.) Fairfax's book value has increased 78% over the past 13 years.

4.) Fairfax's share price has increased 52% over the past 13 years.

 

It doesn't look to me like Fairfax's BV or share price over the past 13 years have kept up with the increase in intrinsic value. 

---------

• Yes, I am ignoring the significant increase in net debt. For reference, interest costs at Fairfax will run about $500 million in 2023.
• I am also ignoring minority interests (Odyssey, Allied and Brit). Cost of $200 million per year (8% of $2.5 billion)?

Thoughts?

 

 

Edited April 13, 2023 by Viking

[Munger_Disciple]

@Viking

Why do you use 95CR as the "normalized" number for insurance? I would think it is almost impossible to predict insurance underwriting results on a yearly basis (shit may hit the fan in any given year just due to randomness even if underwriting is disciplined) & one can only make an educated guess about any company's longer term underwriting results. I would think something like 100CR is a very good LT "normalized" underwriting result for any insurance company (especially when treasury bills yield 5%). 

[Viking]

28 minutes ago, Munger_Disciple said:

@Viking

Why do you use 95CR as the "normalized" number for insurance? I would think it is almost impossible to predict insurance underwriting results on a yearly basis (shit may hit the fan in any given year just due to randomness even if underwriting is disciplined) & one can only make an educated guess about any company's longer term underwriting results. I would think something like 100CR is a very good LT "normalized" underwriting result for any insurance company (especially when treasury bills yield 5%). 

@Munger_Disciple When i put together my forecasts for Fairfax (any company) i tend to look one or perhaps two years out. Too many variables change to try and look out 3 years and more with any precision. My current estimate is for Fairfax to achieve a 95 CR in 2023 and 2024. Same as what my estimate was for 2022. With most forecasts i usually start with the trend and then incorporate new news. Each quarter i tweak my estimate based on actual results. Too aggressive? We will see. As i get new news i will adjust my estimate. 

• The average the past 10 years has been 95.7 and the average the past 2 years has been 94.9 (and cat losses have been quite high the past 2 years).
• We are still in a hard market (yes, it is slowing). Reinsurance hard market looks like it just started (property cat) - this could be very beneficial for Odyssey. We will find out with Q1 results more on this front.
• Fairfax continues to improve as an underwriter. Brit has been a problem in recent years and Fairfax has said they will be significantly reducing cat exposure for Brit in 2023. I think Andy Barnard has done a fantastic job over the past 10 years, including integrating all the large purchases.

In terms of using a 95CR in my previous post… it was just used as a random example. I was trying to show the change in underwriting profit over 13 years. 

Edited April 13, 2023 by Viking

[valuesource]

18 hours ago, Viking said:

@Munger_Disciple When i put together my forecasts for Fairfax (any company) i tend to look one or perhaps two years out. Too many variables change to try and look out 3 years and more with any precision. My current estimate is for Fairfax to achieve a 95 CR in 2023 and 2024. Same as what my estimate was for 2022. With most forecasts i usually start with the trend and then incorporate new news. Each quarter i tweak my estimate based on actual results. Too aggressive? We will see. As i get new news i will adjust my estimate. 

• The average the past 10 years has been 95.7 and the average the past 2 years has been 94.9 (and cat losses have been quite high the past 2 years).
• We are still in a hard market (yes, it is slowing). Reinsurance hard market looks like it just started (property cat) - this could be very beneficial for Odyssey. We will find out with Q1 results more on this front.
• Fairfax continues to improve as an underwriter. Brit has been a problem in recent years and Fairfax has said they will be significantly reducing cat exposure for Brit in 2023. I think Andy Barnard has done a fantastic job over the past 10 years, including integrating all the large purchases.

In terms of using a 95CR in my previous post… it was just used as a random example. I was trying to show the change in underwriting profit over 13 years. 

You know what Viking?  I find your estimates quite helpful.  Sure it's a plug number (with assumptions) but the primary difference I can see from 2 yrs ago is the predictability of FFH earnings has risen substantially.  

[Viking]

On 4/13/2023 at 1:02 PM, valuesource said:

You know what Viking?  I find your estimates quite helpful.  Sure it's a plug number (with assumptions) but the primary difference I can see from 2 yrs ago is the predictability of FFH earnings has risen substantially.  

 

@valuesource The big difference I see at Fairfax today compared to 2 years ago is the size of future earnings for all important buckets is materially higher: underwriting profit + interest & dividends + share of profit of associates + investment gains (this is the most volatile).

 

When I worked at Kraft and Saputo I used to spend weeks every fall building the next years annual business budget for the business I was managing at the time. My experience was if you get the 'big rocks' right your final forecasted numbers tend to be quite accurate (all the pieces move around but the final number comes in remarkably close at the end of the following year). To get the 'big rocks' right the key was quantifying the puts and the takes (the changes - the big business gains and losses, new products etc). I try and do the same logical build with Fairfax. Everyone can see my building blocks. And therefore can make adjustments as they see fit. I am constantly making adjustments to my Fairfax estimates - it is, after all, simply an educated guess. As new news becomes available, the estimates change.

 

What is nice with Fairfax is interest and dividend income is now the biggest component of earnings. The run rate at Dec 31, 2022 was $1.5 billion and I expect this number will be higher when Fairfax reports Q1 results. This bucket is pretty predictable quarter to quarter and should provide a nice anchor to reported results. 

Edited April 15, 2023 by Viking

[Viking]

Fairfax’s equity portfolio looks very well positioned today. Most of the equity holdings purchased since 2018 have been performing well. And, after years of hard work, the poor performing equity holdings (many purchased from 2014-2017) have largely been fixed and are now performing well. In fact, the equity portfolio looks better positioned today than at any other time in Fairfax’s recent history (in terms of size and quality). We are increasingly seeing the benefits in improved reported results. The best recent example is ‘share of profit of associates,’ which spiked to more than $1 billion in 2022; the previous high was $402 million in 2021.

 

What happened? Four things:

1.) Fairfax learned lots of lessons from the poor purchases they made from 2014-2017. They are putting a premium on management. Hamblin Watsa has decided it is not a turn-around shop - looking to actively run poorly lead/challenged businesses. They are not a piggy bank for poorly run companies in search of cash. It appears to me that Fairfax has tweaked their methodologies used when allocating capital.

 

Others on this board argue that:

2.) the Fed and the ending of easy money (zero interest rates/QE) is a key driver in the stronger performance the past 2 years of Fairfax’s equity holdings. Value investing is back!

3.) the timing of the cycle is finally working in Fairfax’s favour and this is driving the stronger performance of the equity holdings. Value, resource and commodity stocks are all in a secular bull market.

4.) opportunities available in recent years are more in Fairfax’s wheelhouse (i.e. TRS on Fairfax shares, buying back shares of Fairfax India at 60% of BV etc).

 

At the end of the day, all of the above is likely partly responsible for the improvement we have seen in Fairfax's equity holdings in recent years.

—————

It can be instructive to look into the past so we can learn. This helps us understand what has been baked in to past results. In turn, this can help us understand what may happen in the future.

 

What happened with the purchases from 2014-2017?

 

10 investments are briefly reviewed below. Fairfax invested a total of about $3.5 billion in these 10 investments over the years. Over the past 8 years my math says Fairfax booked losses in these 10 investments of about $1.5 billion (about $200 million, on average, each and every year). For example, in 2022, Fairfax wrote down its investment in Farmers Edge by $133 million. Stuff like that.

 

Of course, the far bigger cost to shareholders has been the opportunity cost. Prem says repeatedly that Fairfax expects its equity investments to deliver returns of 15% per year. Applying a more modest 10% target, the $3.5 billion in investments (made 2014-2017) should have doubled in value by now to $7 billion. Clearly that has not happened with these investments. The opportunity cost of the poor investments made from 2014-2017 is likely an additional $2 billion.

 

This is actually a good news post. The good news is:

1.) the equity purchases made from 2018 to April 2023, as a group, look very good and are performing well. 

2.) as I will review below, the problem investments from 2014-2017 look like they are not only fixed - they are also (mostly) poised to deliver solid returns for Fairfax shareholders moving forward. An 8 year long big headwind has now become a big tailwind. 

 

As a result, I expect Fairfax’s $16 billion equity portfolio to generate a much higher total return (percent and absolute) in the coming years than it has delivered over the last decade. Given its current construction, I think it could well compound at 12% over the next couple of years = $1.9 billion/year in earnings:

• dividends = $120 million
• share of profit of associates = $900 million
• consolidated earnings = $240 million
• mark-to-market investment gains = $650 million (not including fixed income)

—————-

Below is a short review of 10 large investments made over the 4 years from 2014-2017.

 

1.) EXCO Resources (2015): Fairfax’s initial investment was $300 million in 2015. We have since learned that shale was a bubble and it eviscerated something like $5 billion in capital up until 2020. Fairfax reported cumulative realized losses of $296 million on EXCO in 2019 (that’s what they said in the AR).

• Learning: old economic model for shale was a sham.
• The good news: energy looks like it is in a structural bull market; new economic model for shale looks good - focussed on shareholder return.

2.) APR (2016): Fairfax invested a total of $462 million in APR in 2016 and 2017. In 2018 they sold it to Atlas for $200 million (in Atlas stock). The first thing Atlas did was replace the CEO.

• Learning: Terrible business. Poorly managed.
• The good news: APR is now Atlas’ problem.

3.) Fairfax Africa (2017): launched with much fanfare in 2017, Fairfax invested a total $476 million. Two short years later Fairfax exited its management of the business and moved the assets to a fund managed by Helios. The value of the Helios fund today is about $100 million. I am not sure what the total financial loss was for Fairfax on this investment but it was significant. The damage to Fairfax’s reputation was also significant.

• Learning: Hubris on steroids? Terrible idea. Worse execution.
• The good news: Fairfax is partnered with Helios and looks well positioned moving forward in Africa. This is now a small investment for Fairfax.

4.) Farmers Edge (2017): Fairfax invested $159 million in Farmers Edge in 2017. Farmers Edge completed its IPO in 2021 and in the 2021 AR Fairfax said their total investment in Farmers Edge to that point was $376 million. CEO ‘stepped down’ in April of 2022. In the 2022 AR, Fairfax said Farmer’s Edge had a carrying value of $71 million, after taking a $133 million write down in 2022. Market value of Fairfax stake was $5 million at Dec 31, 2022. My guess is this investment, because it performed so terribly post-IPO, has caused Fairfax some damage to its reputation (given Fairfax was the majority shareholder).

• Learning: Yup, SPAC’s were a bubble.
• The good news: carrying value is $71 million. This is now a small investment for Fairfax.

5.) Eurobank (2014): Fairfax invested $444 million in Eurobank in 2014. This initial investment went to close to zero later that year when the ECB came in and mandated a 1 for 100 reverse share split. What was the problem? Greece was in the midst of a depression. What did Fairfax do? It doubled down and invested another $389 million in Eurobank in 2015. in 2019, Eurobank executed a capital raise / merger with Grivalia. Greece elected a pro-business government in 2018. Eurobank fixed its balance sheet.

• Learnings: Just because the strategy worked in Ireland doesn’t mean it would also work in Greece.
• The good news: Greece’s economy is very well positioned. Eurobank, always well managed, is executing well and earnings are spiking: share of profit of associates for Eurobank was $263 million in 2022, increasing from $162 million in 2021. Prem estimated Eurobank could earn €0.20/share in 2023; if so, Fairfax’s share of profits for Eurobank could be well over $300 million in 2023. This investment is looking like it will turn into a home run for Fairfax in the coming years - a Greek tragedy turns to triumph!

6.) AGT (2017): Fairfax invested $148 million in AGT in 2017. In 2019, as AGT was experiencing financial difficulties, Fairfax took AGT private, spending another $227 million (I think).

• Learnings: It takes much more than a dynamic Canadian founder to succeed.
• The good news: from 2022 Fairfax AR: “AGT, run by founder and CEO Murad Al-Katib, had a record year in 2022, with EBITDA of over Cdn$150 million. This is a dramatic improvement from the time of the take-private transaction almost four years ago when the business was generating slightly over Cdn$60 million in EBITDA… Fairfax has an approximate 60% stake in AGT.”

7.) Commercial Industrial Bank (CIB) Egypt (2014): Fairfax invested $330 million in CIB in 2014. Today the position is worth about $240 million. Great company. Solid management. What is the problem? Egypt’s economy has been a slow moving train wreck for decades - with constant currency devaluations.

• Learning: Constant currency devaluations (like 50% in the last year) hurt equity values.
• The good news: the bank is well managed.

8.) Mosaic Capital (2017): Fairfax invested $116 million in Mosaic in 2017. In 2021, Mosaic was taken private (not by Fairfax) with Fairfax owning 20% of the new investment. This investment went sideways for may years (that opportunity cost thing).

• Learning: not every investment you make is going to work out the way you plan.
• The good news: Fairfax found a partner where Mosaic will hopefully be a better fit.

9.) Recipe/CARA (2014 & 2016): Fairfax also made a couple of restaurant investments from 2014-2017: $77 million in the Keg in 2014 (later merged with CARA in 2018) and $100 million in the CARA capital raise in $2016. Recipe/CARA was a poor investment for minority shareholders over its lifetime.

• Learning: the restaurant business in Canada is a tough business. Consolidating it proved to be even tougher.
• The good news: In the take private deal in 2022, Fairfax purchased Recipe at a covid-low price. Recipe has a solid collection of assets that should be able to produce significant free cash flow for Fairfax moving forward.

10.) Astarta (2017): Fairfax invested $104 million in Astarta in 2017. Today that investment is worth around $45 million. I know very little about this investment. I wonder if it is not a similar situation to CIB, with opportunity cost being the big issue.

 

Honorable mention: Torstar was initiated as a position before 2014 so I did not include it. However, Fairfax added to its position in 2014, 2016 and 2017 (yes, small amounts). In 2020 it sold the business and booked a $52 million loss.

 

I see lots of self inflicted wounds in the investments listed above - the list reminds me of the Monty Python skit “tis but a scratch" (see bottom on post for some entertainment).

 

 

 

 

Edited April 15, 2023 by Viking

[keegomaster]

13 hours ago, Viking said:

Fairfax’s equity portfolio looks very well positioned today. Most of the equity holdings purchased since 2018 have been performing well. And, after years of hard work, the poor performing equity holdings (many purchased from 2014-2017) have largely been fixed and are now performing well. In fact, the equity portfolio looks better positioned today than at any other time in Fairfax’s recent history (in terms of size and quality). We are increasingly seeing the benefits in improved reported results. The best recent example is ‘share of profit of associates,’ which spiked to more than $1 billion in 2022; the previous high was $402 million in 2021.

 

What happened? Four things:

1.) Fairfax learned lots of lessons from the poor purchases they made from 2014-2017. They are putting a premium on management. Hamblin Watsa has decided it is not a turn-around shop - looking to actively run poorly lead/challenged businesses. They are not a piggy bank for poorly run companies in search of cash. It appears to me that Fairfax has tweaked their methodologies used when allocating capital.

 

Others on this board argue that:

2.) the Fed and the ending of easy money (zero interest rates/QE) is a key driver in the stronger performance the past 2 years of Fairfax’s equity holdings. Value investing is back!

3.) the timing of the cycle is finally working in Fairfax’s favour and this is driving the stronger performance of the equity holdings. Value, resource and commodity stocks are all in a secular bull market.

4.) opportunities available in recent years are more in Fairfax’s wheelhouse (i.e. TRS on Fairfax shares, buying back shares of Fairfax India at 60% of BV etc).

 

At the end of the day, all of the above is likely partly responsible for the improvement we have seen in Fairfax's equity holdings in recent years.

—————

It can be instructive to look into the past so we can learn. This helps us understand what has been baked in to past results. In turn, this can help us understand what may happen in the future.

 

What happened with the purchases from 2014-2017?

 

10 investments are briefly reviewed below. Fairfax invested a total of about $3.5 billion in these 10 investments over the years. Over the past 8 years my math says Fairfax booked losses in these 10 investments of about $1.5 billion (about $200 million, on average, each and every year). For example, in 2022, Fairfax wrote down its investment in Farmers Edge by $133 million. Stuff like that.

 

Of course, the far bigger cost to shareholders has been the opportunity cost. Prem says repeatedly that Fairfax expects its equity investments to deliver returns of 15% per year. Applying a more modest 10% target, the $3.5 billion in investments (made 2014-2017) should have doubled in value by now to $7 billion. Clearly that has not happened with these investments. The opportunity cost of the poor investments made from 2014-2017 is likely an additional $2 billion.

 

This is actually a good news post. The good news is:

1.) the equity purchases made from 2018 to April 2023, as a group, look very good and are performing well. 

2.) as I will review below, the problem investments from 2014-2017 look like they are not only fixed - they are also (mostly) poised to deliver solid returns for Fairfax shareholders moving forward. An 8 year long big headwind has now become a big tailwind. 

 

As a result, I expect Fairfax’s $16 billion equity portfolio to generate a much higher total return (percent and absolute) in the coming years than it has delivered over the last decade. Given its current construction, I think it could well compound at 12% over the next couple of years = $1.9 billion/year in earnings:

• dividends = $120 million
• share of profit of associates = $900 million
• consolidated earnings = $240 million
• mark-to-market investment gains = $650 million (not including fixed income)

—————-

Below is a short review of 10 large investments made over the 4 years from 2014-2017.

 

1.) EXCO Resources (2015): Fairfax’s initial investment was $300 million in 2015. We have since learned that shale was a bubble and it eviscerated something like $5 billion in capital up until 2020. Fairfax reported cumulative realized losses of $296 million on EXCO in 2019 (that’s what they said in the AR).

• Learning: old economic model for shale was a sham.
• The good news: energy looks like it is in a structural bull market; new economic model for shale looks good - focussed on shareholder return.

2.) APR (2016): Fairfax invested a total of $462 million in APR in 2016 and 2017. In 2018 they sold it to Atlas for $200 million (in Atlas stock). The first thing Atlas did was replace the CEO.

• Learning: Terrible business. Poorly managed.
• The good news: APR is now Atlas’ problem.

3.) Fairfax Africa (2017): launched with much fanfare in 2017, Fairfax invested a total $476 million. Two short years later Fairfax exited its management of the business and moved the assets to a fund managed by Helios. The value of the Helios fund today is about $100 million. I am not sure what the total financial loss was for Fairfax on this investment but it was significant. The damage to Fairfax’s reputation was also significant.

• Learning: Hubris on steroids? Terrible idea. Worse execution.
• The good news: Fairfax is partnered with Helios and looks well positioned moving forward in Africa. This is now a small investment for Fairfax.

4.) Farmers Edge (2017): Fairfax invested $159 million in Farmers Edge in 2017. Farmers Edge completed its IPO in 2021 and in the 2021 AR Fairfax said their total investment in Farmers Edge to that point was $376 million. CEO ‘stepped down’ in April of 2022. In the 2022 AR, Fairfax said Farmer’s Edge had a carrying value of $71 million, after taking a $133 million write down in 2022. Market value of Fairfax stake was $5 million at Dec 31, 2022. My guess is this investment, because it performed so terribly post-IPO, has caused Fairfax some damage to its reputation (given Fairfax was the majority shareholder).

• Learning: Yup, SPAC’s were a bubble.
• The good news: carrying value is $71 million. This is now a small investment for Fairfax.

5.) Eurobank (2014): Fairfax invested $444 million in Eurobank in 2014. This initial investment went to close to zero later that year when the ECB came in and mandated a 1 for 100 reverse share split. What was the problem? Greece was in the midst of a depression. What did Fairfax do? It doubled down and invested another $389 million in Eurobank in 2015. in 2019, Eurobank executed a capital raise / merger with Grivalia. Greece elected a pro-business government in 2018. Eurobank fixed its balance sheet.

• Learnings: Just because the strategy worked in Ireland doesn’t mean it would also work in Greece.
• The good news: Greece’s economy is very well positioned. Eurobank, always well managed, is executing well and earnings are spiking: share of profit of associates for Eurobank was $263 million in 2022, increasing from $162 million in 2021. Prem estimated Eurobank could earn €0.20/share in 2023; if so, Fairfax’s share of profits for Eurobank could be well over $300 million in 2023. This investment is looking like it will turn into a home run for Fairfax in the coming years - a Greek tragedy turns to triumph!

6.) AGT (2017): Fairfax invested $148 million in AGT in 2017. In 2019, as AGT was experiencing financial difficulties, Fairfax took AGT private, spending another $227 million (I think).

• Learnings: It takes much more than a dynamic Canadian founder to succeed.
• The good news: from 2022 Fairfax AR: “AGT, run by founder and CEO Murad Al-Katib, had a record year in 2022, with EBITDA of over Cdn$150 million. This is a dramatic improvement from the time of the take-private transaction almost four years ago when the business was generating slightly over Cdn$60 million in EBITDA… Fairfax has an approximate 60% stake in AGT.”

7.) Commercial Industrial Bank (CIB) Egypt (2014): Fairfax invested $330 million in CIB in 2014. Today the position is worth about $240 million. Great company. Solid management. What is the problem? Egypt’s economy has been a slow moving train wreck for decades - with constant currency devaluations.

• Learning: Constant currency devaluations (like 50% in the last year) hurt equity values.
• The good news: the bank is well managed.

8.) Mosaic Capital (2017): Fairfax invested $116 million in Mosaic in 2017. In 2021, Mosaic was taken private (not by Fairfax) with Fairfax owning 20% of the new investment. This investment went sideways for may years (that opportunity cost thing).

• Learning: not every investment you make is going to work out the way you plan.
• The good news: Fairfax found a partner where Mosaic will hopefully be a better fit.

9.) Recipe/CARA (2014 & 2016): Fairfax also made a couple of restaurant investments from 2014-2017: $77 million in the Keg in 2014 (later merged with CARA in 2018) and $100 million in the CARA capital raise in $2016. Recipe/CARA was a poor investment for minority shareholders over its lifetime.

• Learning: the restaurant business in Canada is a tough business. Consolidating it proved to be even tougher.
• The good news: In the take private deal in 2022, Fairfax purchased Recipe at a covid-low price. Recipe has a solid collection of assets that should be able to produce significant free cash flow for Fairfax moving forward.

10.) Astarta (2017): Fairfax invested $104 million in Astarta in 2017. Today that investment is worth around $45 million. I know very little about this investment. I wonder if it is not a similar situation to CIB, with opportunity cost being the big issue.

 

Honorable mention: Torstar was initiated as a position before 2014 so I did not include it. However, Fairfax added to its position in 2014, 2016 and 2017 (yes, small amounts). In 2020 it sold the business and booked a $52 million loss.

 

I see lots of self inflicted wounds in the investments listed above - the list reminds me of the Monty Python skit “tis but a scratch" (see bottom on post for some entertainment).

 

 

 

 

Thanks for the analysis. Can't help but gasp at the value destruction. It's like Hamlin Watsa just set money on fire. 

Were it not for the hard market in insurance, and the smart no bond positioning management FFH would not be a good investment. 

Thanks for the thoughtful look back, Viking. 

[SafetyinNumbers]

1 hour ago, keegomaster said:

Thanks for the analysis. Can't help but gasp at the value destruction. It's like Hamlin Watsa just set money on fire. 

Were it not for the hard market in insurance, and the smart no bond positioning management FFH would not be a good investment. 

Thanks for the thoughtful look back, Viking. 

I think that would depend on the price. It’s an interesting exercise to think about what a third party would pay for all of Fairfax’s equity portfolio if given the chance. Arguably, the market is not giving it much value at all.

[Viking]

23 hours ago, Viking said:

Fairfax’s equity portfolio looks very well positioned today. Most of the equity holdings purchased since 2018 have been performing well. And, after years of hard work, the poor performing equity holdings (many purchased from 2014-2017) have largely been fixed and are now performing well. In fact, the equity portfolio looks better positioned today than at any other time in Fairfax’s recent history (in terms of size and quality). We are increasingly seeing the benefits in improved reported results. The best recent example is ‘share of profit of associates,’ which spiked to more than $1 billion in 2022; the previous high was $402 million in 2021.

 

What happened? Four things:

1.) Fairfax learned lots of lessons from the poor purchases they made from 2014-2017. They are putting a premium on management. Hamblin Watsa has decided it is not a turn-around shop - looking to actively run poorly lead/challenged businesses. They are not a piggy bank for poorly run companies in search of cash. It appears to me that Fairfax has tweaked their methodologies used when allocating capital.

 

Others on this board argue that:

2.) the Fed and the ending of easy money (zero interest rates/QE) is a key driver in the stronger performance the past 2 years of Fairfax’s equity holdings. Value investing is back!

3.) the timing of the cycle is finally working in Fairfax’s favour and this is driving the stronger performance of the equity holdings. Value, resource and commodity stocks are all in a secular bull market.

4.) opportunities available in recent years are more in Fairfax’s wheelhouse (i.e. TRS on Fairfax shares, buying back shares of Fairfax India at 60% of BV etc).

 

At the end of the day, all of the above is likely partly responsible for the improvement we have seen in Fairfax's equity holdings in recent years.

—————

It can be instructive to look into the past so we can learn. This helps us understand what has been baked in to past results. In turn, this can help us understand what may happen in the future.

 

What happened with the purchases from 2014-2017?

 

10 investments are briefly reviewed below. Fairfax invested a total of about $3.5 billion in these 10 investments over the years. Over the past 8 years my math says Fairfax booked losses in these 10 investments of about $1.5 billion (about $200 million, on average, each and every year). For example, in 2022, Fairfax wrote down its investment in Farmers Edge by $133 million. Stuff like that.

 

Of course, the far bigger cost to shareholders has been the opportunity cost. Prem says repeatedly that Fairfax expects its equity investments to deliver returns of 15% per year. Applying a more modest 10% target, the $3.5 billion in investments (made 2014-2017) should have doubled in value by now to $7 billion. Clearly that has not happened with these investments. The opportunity cost of the poor investments made from 2014-2017 is likely an additional $2 billion.

 

This is actually a good news post. The good news is:

1.) the equity purchases made from 2018 to April 2023, as a group, look very good and are performing well. 

2.) as I will review below, the problem investments from 2014-2017 look like they are not only fixed - they are also (mostly) poised to deliver solid returns for Fairfax shareholders moving forward. An 8 year long big headwind has now become a big tailwind. 

 

As a result, I expect Fairfax’s $16 billion equity portfolio to generate a much higher total return (percent and absolute) in the coming years than it has delivered over the last decade. Given its current construction, I think it could well compound at 12% over the next couple of years = $1.9 billion/year in earnings:

• dividends = $120 million
• share of profit of associates = $900 million
• consolidated earnings = $240 million
• mark-to-market investment gains = $650 million (not including fixed income)

—————-

Below is a short review of 10 large investments made over the 4 years from 2014-2017.

 

1.) EXCO Resources (2015): Fairfax’s initial investment was $300 million in 2015. We have since learned that shale was a bubble and it eviscerated something like $5 billion in capital up until 2020. Fairfax reported cumulative realized losses of $296 million on EXCO in 2019 (that’s what they said in the AR).

• Learning: old economic model for shale was a sham.
• The good news: energy looks like it is in a structural bull market; new economic model for shale looks good - focussed on shareholder return.

2.) APR (2016): Fairfax invested a total of $462 million in APR in 2016 and 2017. In 2018 they sold it to Atlas for $200 million (in Atlas stock). The first thing Atlas did was replace the CEO.

• Learning: Terrible business. Poorly managed.
• The good news: APR is now Atlas’ problem.

3.) Fairfax Africa (2017): launched with much fanfare in 2017, Fairfax invested a total $476 million. Two short years later Fairfax exited its management of the business and moved the assets to a fund managed by Helios. The value of the Helios fund today is about $100 million. I am not sure what the total financial loss was for Fairfax on this investment but it was significant. The damage to Fairfax’s reputation was also significant.

• Learning: Hubris on steroids? Terrible idea. Worse execution.
• The good news: Fairfax is partnered with Helios and looks well positioned moving forward in Africa. This is now a small investment for Fairfax.

4.) Farmers Edge (2017): Fairfax invested $159 million in Farmers Edge in 2017. Farmers Edge completed its IPO in 2021 and in the 2021 AR Fairfax said their total investment in Farmers Edge to that point was $376 million. CEO ‘stepped down’ in April of 2022. In the 2022 AR, Fairfax said Farmer’s Edge had a carrying value of $71 million, after taking a $133 million write down in 2022. Market value of Fairfax stake was $5 million at Dec 31, 2022. My guess is this investment, because it performed so terribly post-IPO, has caused Fairfax some damage to its reputation (given Fairfax was the majority shareholder).

• Learning: Yup, SPAC’s were a bubble.
• The good news: carrying value is $71 million. This is now a small investment for Fairfax.

5.) Eurobank (2014): Fairfax invested $444 million in Eurobank in 2014. This initial investment went to close to zero later that year when the ECB came in and mandated a 1 for 100 reverse share split. What was the problem? Greece was in the midst of a depression. What did Fairfax do? It doubled down and invested another $389 million in Eurobank in 2015. in 2019, Eurobank executed a capital raise / merger with Grivalia. Greece elected a pro-business government in 2018. Eurobank fixed its balance sheet.

• Learnings: Just because the strategy worked in Ireland doesn’t mean it would also work in Greece.
• The good news: Greece’s economy is very well positioned. Eurobank, always well managed, is executing well and earnings are spiking: share of profit of associates for Eurobank was $263 million in 2022, increasing from $162 million in 2021. Prem estimated Eurobank could earn €0.20/share in 2023; if so, Fairfax’s share of profits for Eurobank could be well over $300 million in 2023. This investment is looking like it will turn into a home run for Fairfax in the coming years - a Greek tragedy turns to triumph!

6.) AGT (2017): Fairfax invested $148 million in AGT in 2017. In 2019, as AGT was experiencing financial difficulties, Fairfax took AGT private, spending another $227 million (I think).

• Learnings: It takes much more than a dynamic Canadian founder to succeed.
• The good news: from 2022 Fairfax AR: “AGT, run by founder and CEO Murad Al-Katib, had a record year in 2022, with EBITDA of over Cdn$150 million. This is a dramatic improvement from the time of the take-private transaction almost four years ago when the business was generating slightly over Cdn$60 million in EBITDA… Fairfax has an approximate 60% stake in AGT.”

7.) Commercial Industrial Bank (CIB) Egypt (2014): Fairfax invested $330 million in CIB in 2014. Today the position is worth about $240 million. Great company. Solid management. What is the problem? Egypt’s economy has been a slow moving train wreck for decades - with constant currency devaluations.

• Learning: Constant currency devaluations (like 50% in the last year) hurt equity values.
• The good news: the bank is well managed.

8.) Mosaic Capital (2017): Fairfax invested $116 million in Mosaic in 2017. In 2021, Mosaic was taken private (not by Fairfax) with Fairfax owning 20% of the new investment. This investment went sideways for may years (that opportunity cost thing).

• Learning: not every investment you make is going to work out the way you plan.
• The good news: Fairfax found a partner where Mosaic will hopefully be a better fit.

9.) Recipe/CARA (2014 & 2016): Fairfax also made a couple of restaurant investments from 2014-2017: $77 million in the Keg in 2014 (later merged with CARA in 2018) and $100 million in the CARA capital raise in $2016. Recipe/CARA was a poor investment for minority shareholders over its lifetime.

• Learning: the restaurant business in Canada is a tough business. Consolidating it proved to be even tougher.
• The good news: In the take private deal in 2022, Fairfax purchased Recipe at a covid-low price. Recipe has a solid collection of assets that should be able to produce significant free cash flow for Fairfax moving forward.

10.) Astarta (2017): Fairfax invested $104 million in Astarta in 2017. Today that investment is worth around $45 million. I know very little about this investment. I wonder if it is not a similar situation to CIB, with opportunity cost being the big issue.

 

Honorable mention: Torstar was initiated as a position before 2014 so I did not include it. However, Fairfax added to its position in 2014, 2016 and 2017 (yes, small amounts). In 2020 it sold the business and booked a $52 million loss.

 

I see lots of self inflicted wounds in the investments listed above - the list reminds me of the Monty Python skit “tis but a scratch" (see bottom on post for some entertainment).

 

 

 

 

 

As a follow up to my previous post on Fairfax’s equity holdings let’s now review the 10 largest equity purchases made from 2018 to today. As a group, these investments have already delivered considerable value to Fairfax shareholders. And they like they are just getting started.

 

1.) Fairfax Total Return Swap (TRS) - equity derivative (2020): Late in 2020 and early in 2021, Fairfax purchased TRS giving it exposure to 1.96 million Fairfax shares at an average cost of $372.96/share. Fairfax shares closed Friday at $658/share. This puts the gain at $285/share (+71%) = $559 million (before cost to carry TRS).

 

That is amazing return over 28 months. Fairfax shares, trading at 1 x trailing BV, are still very cheap. My estimate is this investment will deliver another $250 million return to Fairfax shareholders in each of the next 2 years; if this happens, this would put the total return at over $1 billion. This investment is quickly becoming one of Fairfax’s best ever.

 

2.) Fairfax (2021): in the fall of 2021, Fairfax invested $1 billion in Fairfax, buying 2 million shares at $500/share. Fairfax’s book value at Dec 31, 2022 was $658/share. My guess is book value at Dec 31, 2023 will be about $770/share and Dec 31, 2024 it will be $880/share. Stock buybacks should only be done when your shares are trading at a discount to intrinsic value. This investment already looks very good for shareholders.

 

These first two investments show Fairfax at its very best. Value investors. Opportunistic. Creative. Aggressive (with position size). Timed perfectly.

 

3.) Seaspan (2018): In February 2018, Fairfax made their first investment in Seaspan (now Atlas). Why? David Sokol. Atlas is Fairfax’s largest equity holding today. Fairfax owns 131 million shares of Atlas (43% ownership) with a carrying value of $1.5 billion ($12.39/share) and a market value of $1.865 billion ($15.34/share). The first 76 million shares Fairfax invested in Atlas were purchased at $6.50/share.

 

In the 2022AR, Prem said as the new-build strategy is executed Atlas may hit EBITDA of $1.75 billion in 2025; in 2022 adjusted EBITDA was $1.135 billion. In 2022 Atlas delivered share of profit of associates of $258 million to Fairfax. This number looks likely to increase to over $300 million/year in the coming years. This investment looks poised to be another $1 billion winner for Fairfax.

 

4.) Stelco (2018): in late 2018, Fairfax invested $193 million for a 13.7% stake in Stelco. A steel producer? At the time I did not like the purchase. It screamed ‘old Fairfax’ to me. Boy, was I wrong. Steel went to record prices. The CEO, Alan Kestenbaum, is exceptional. Stelco has paid regular and large special dividends. Fairfax’s position is now worth $470 million; they own 23.6% of Stelco. With all the infrastructure/energy transition/home-shoring plans - steel looks to be in a secular bull market. This investment has been a home run for Fairfax shareholders with lots of runway left.

 

5.) Foran Mining (2021): in Aug 2021, Fairfax invested $78 million in Foran Mining. Pierre Lassonde is another large shareholder (founder of Franco-Nevada). Foran is developing a large copper mine in Saskatchewan. As we execute the EV transition, looking out only a couple of years, it is expected demand for copper is going to exceed supply. Right about when this mine should be starting up production. Market value of Fairfax’s position is currently $220 million. It the mine works out, and copper prices move much higher, this investment is going to go much higher. Yes, lots of risk.

 

6.) Recipe (2022): in Aug, 2022, Fairfax invested $342 million (with $100 million coming from Recipe) to take Recipe private (Fairfax owns 84%). Fairfax has been a major consolidator of the Canadian restaurant industry starting in 2012. They understand Recipe very well. They got the asset at an attractive price (at a covid discount). Recipe has a carrying value of $594 million for Fairfax. Recipe generated free cash flow of about $110 million each year from 2017-2019 (pre-covid). They should be able to get back there, which would deliver about $95 million/year to Fairfax. This could become a meaningful and predictable cash generator for Fairfax moving forward.

 

7.) Large cap stocks (BAC, OXY, CVX, BABA, Micron): Fairfax invested $380 million in a number of large cap, mostly US, stocks in Q2 and Q3 of 2022. Banking. Energy. Technology. Solid companies. Good core, long term holdings. Should deliver a solid return for Fairfax shareholders in the years to come.

 

8.) Grivalia Hospitality (2022): in July 2022 Fairfax purchased Grivalia Hospitality from Eurobank for $195 million. Here is what Prem had to say in the 2022AR: “Recognizing the outstanding results achieved at Grivalia Hospitality by George Chryssikos, Vice Chair of Eurobank, in 2022 we increased our ownership to 78%. Grivalia Hospitality is a leading investor in Greece’s booming ultra- luxury hotel space, with three operating assets and seven under development. You will remember that George ran Grivalia Properties, a public company of which we owned 51%. Eurobank and Grivalia Properties merged in 2019 when Eurobank needed capital. The gains from Grivalia Properties and the Eurobank shares we acquired on the merger have resulted in a total gain to Fairfax of approximately $1 billion. We gratefully add George’s name to Richie Boucher’s from the Bank of Ireland, who was our first billion dollar man.” Fairfax has done exceptionally well investing alongside of George Chryssikos. Let’s hope George’s Midas touch continues to the benefit of Fairfax shareholders.

 

9.) Dexterra/Carillion/Horizon North (2018): in March of 2018. Fairfax purchased Carillion Canada out of bankruptcy protection (it was the UK operations that were in trouble). In May of 2020, Dexterra engineered a reverse takeover of Horizon North. Fairfax owns 49% of Dexterra. Dexterra has a near term target to get to C$100 million in EBITDA. They are funding their growth internally which is encouraging. 2022 had some near term challenges (inflation and labour) in Modular Solutions and Facilities Management units. Carrying value is $103 million. Market value today is $121 million. There is a reasonable chance company could get to its C$100 million EBITDA target in 2023.

 

10.) Toys “R” US (2018): In 2018, Fairfax purchased Toys “R” Us Canada out of bankruptcy for $235 million. At the time of purchase this transaction was a bit of a head scratcher. However, in 2021, Fairfax sold the retail operations and kept the real estate and the transaction made much more sense. Not sure what the current value is.

Edited April 16, 2023 by Viking

[Viking]

To close the loop on my deep dive into Fairfax's equity holdings, here is an approximate size ranking and portfolio weightings to March 31 2023. I removed Resolute Forest Products ($626 million) from the list given that transaction has closed. The largest private holding not on the list is AGT (we have not been given a current value from Fairfax in a while). For perspective, a $150 million investment (sounds big) is now = 1% of the equity portfolio - which is pretty small. 

• Top 3 holdings = 33%. All are poised to do very well. And if the big dogs perform...
• Top 10 holdings = 57%. 
• Top 20 holdings = 70%
• $2.8 billion = 20% of holdings is in 'smaller holdings' + 'other limited partnerships, associates, consolidated'

 

 

 

 

Edited April 16, 2023 by Viking

[SafetyinNumbers]

This is all terrific, Viking! Thanks. 
 

What about Digit? I think that investment was made in 2017 and might make @keegomaster more forgiving of the investments made in that period.