Author Topic: Fairfax 2020  (Read 129987 times)

Viking

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Re: Fairfax 2020
« Reply #690 on: November 21, 2020, 10:07:56 PM »
Xerxes, i like your optimism on the share buyback but where does Prem get the $ from? Do they dip further into bank lines? My guess is no. They have been adding to debt total all year.

To your point, they also need $300 million for the US$10 dividend in January (nice 3% yield :-) if they maintain historic payout and timing.

They also may need to take out OMERS at Eurolife (they said this would happen in 2020 in 2019AR).

What all this tells me is it sure would be timely to monetize something big. Lets hope the vaccine trade continues as it is certainly benefitting Fairfax.

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I was looking at Fairfax痴 valuation the last couple of days. Despite increasing US$80 in 3 weeks (30%) FFH remains very cheap.

Here is a goofy kind of way to look at things; some mental gymnastics...

For interest i decided to look at how other insurance companies are trading. Most are now trading once again at levels similar to the end of 2019. Markel is a bit of a laggard trading today 10% below where it was trading at the end of 2019. Fairfax? It is still trading 27% below where it was trading end of 2019 (despite a 30% increase in the last 21 days).

So at the end of 2019 Fairfax had a market cap of US$12.36 billion. And it was not expensive then (trading close to BV then if memory serves my correctly). Today it has a market cap of $9.02 billion. It is down $3.34 billion.

1.) Its insurance operations are better positioned today than they were Dec 31. We are in an insurance hard market and premium growth is strong (double digits).
2.) the bond portfolio is mildly worse: The yield on the bond portfolio is shrinking but they were able to oportunistically able to buy a bunch of corporates back in March/April which helps. Bottom line the continued steep decline in the shares is likely not due to the bond portfolio.
3.) The equity portfolio is likely responsible for the majority of the current $3.34 billion decline in market cap (and underperformance versus peers).

The interesting thing is the equity portfolio is sitting today only about $1.5 billion below where it was trading Dec 31. So we still have a $1.8 billion market cap decline that is kind of unexplained ($3.34 - $1.5). My guess is this amount is a rough approximation of how much Mr. Market is still undervaluing Fairfax. 

Book value is currently US $442. So Fairfax trading at 0.9xBV is still cheap and discounting lots of bad things = $400.

With shares currently trading at $343 i think there is another easy 15% or so to be had in the near term (the next 2 months or so). Mr Market is being overly pessimistic with Fairfax.

And if we get more good news on the vaccine front (likely) and the trend to value stocks the past 2 weeks continues in the coming months (likely) then we should see Fairfax trade once again closer to BV sometime in 1H 2021. Amd BV will be growing again in Q4 and it could easily surpass $500 in 2021.

Looking to 2H 2021, at todays price Fairfax could provide investors a return of 50%. And the stock would still be cheap (still trading at BV)! RBC says given we are in a hard market Fairfax should likely trade closer to 1.2xBV. I don稚 think this is a crazy multiple to pay for Fairfax shares in a hard market and with the wind at the back of their investment portfolio. Yes, there are risks. But in a zero interest rate world the risk return for Fairfax looks good to me.

PS: the equities Fairfax owns are not impaired (i.e. Seaspan is performing well etc) and as we exit the virus in 2021 the equities should perform quite well.
« Last Edit: November 22, 2020, 12:54:49 AM by Viking »


petec

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Re: Fairfax 2020
« Reply #691 on: November 21, 2020, 11:21:32 PM »
Factual question: was accounting BV much different from fair value BV in the Q3 reporting? I seem to remember being surprised at how similar they were but maybe I misread.

Philosophical question: as rates fall the yield on the bond portfolio falls. This reduces Fairfax痴 intrinsic value, all else equal. But in an efficient  market (ha ha) the earnings yield at which Fairfax痴 stock is priced should also fall. Mathematically, do these two effects offset each other perfectly or imperfectly?
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Xerxes

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Re: Fairfax 2020
« Reply #692 on: November 22, 2020, 07:09:10 AM »
Xerxes, i like your optimism on the share buyback but where does Prem get the $ from? Do they dip further into bank lines? My guess is no. They have been adding to debt total all year.

To your point, they also need $300 million for the US$10 dividend in January (nice 3% yield :-) if they maintain historic payout and timing.

They also may need to take out OMERS at Eurolife (they said this would happen in 2020 in 2019AR).

What all this tells me is it sure would be timely to monetize something big. Lets hope the vaccine trade continues as it is certainly benefitting Fairfax.

Never underestimate a man who built a multi-billion dollar sprawling organization out of nothing. If he sees relative buyback value vs. alternative today he will find a way. The same dogged determination that makes him continuing to short technology names (to my anger), will make him find a way to do his buyback if he see relative value.

if needs be, he is going to put the buybacks on his credit card, then roll them over line of credit and then on equity line of credit before matching the liability via an asset sale. Of course i am joking here about credit card, but my point is that if needs be he is going to be jumping through hoops until he gets his asset sale so that he can dividend back to hold-co and get his slug of shares. When it happens it will come out as a surprise.

On a different note, on financial leverage, i am not sure if market value is used for calculation or book value, but i imagine an equity portfolio that has done relatively better than last quarter, should slightly tilt the D/E equation in FFH favour.

Viking

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Re: Fairfax 2020
« Reply #693 on: November 22, 2020, 02:29:49 PM »
Factual question: was accounting BV much different from fair value BV in the Q3 reporting? I seem to remember being surprised at how similar they were but maybe I misread.

Philosophical question: as rates fall the yield on the bond portfolio falls. This reduces Fairfax痴 intrinsic value, all else equal. But in an efficient  market (ha ha) the earnings yield at which Fairfax痴 stock is priced should also fall. Mathematically, do these two effects offset each other perfectly or imperfectly?

On your factual question i remain sceptical about accounting BV at Fairfax. This is primarily due to what we have seen unfold over the past 7-8 years. People do not trust management; they have simply done and said too many dumb things for far too long. So it will take years for Fairfax to turn this around - and this will only happen if management consistently does the right thing and communicates effectively. And the jury is still out on this (from my perspective).

I see some positive moves the past couple of years but the hole Fairfax dug is so deep it will take another 24 months (or longer) to fully deal with many of the legacy issues. The fixes will likely involve a continuation in the write down in book value of the assets like we have seen the last 2 years: EXCO (bonds), Fairfax Africa, Altas Mara, Astarta are just a few that come to mind.

We also continue to see negative surprises like the big loss in Q3 on some mystery short position. These continuing issues are not small dollar amounts. They total hundreds of millions every year. And my guess is they will continue to occur in size for a few more years.  These 双ne time things happen all too frequently with Fairfax and act as an anchor slowing growth in earnings and book value.

The good news is Fairfax does appear to understand and they have slowly been 素ixing the problem children. Moving APR to Atlas was a brilliant move (and look at how much Atlas has done to APR since the purchase). Despite brutal timing (not Fairfax痴 fault) Dexterra痴 reverse takeover of Horizon North could work out very well in the coming years. Merging Fairfax Africa into Helios looks good (needs to close first and even then will be too early to know). Fairfax does appear to understand when they have made a big mistake. And they have been creative in finding solutions. They do appear to be VERY focussed on putting the companies they own in a position to be successful (true for both non-insurance and insurance). That is very encouraging.

Of the large equity positions i prefer to use market value as a proxy (over carrying value).

                    Carrying value.  Market value.     Difference
- Atlas                $896              $1.059            + $163
- Eurobank       $1,137                $619.            - $518
- Quess              $552                 $307.            - $245

Do i think 100% of Digit is worth $858 million because 10% was sold for $91 million? I am sceptical. (I like Digit very much; but i have seen this exercise done before by Fairfax to value assets at premium valuations... like Bangalore Airport.)

- Bangalore.     $1,383.              $684.             + $699

Do i think the airport is worth $1,383 million today? No. Is it worth more than $699? Probably.

So with the large equity positions i like to go with market price (if publicly traded) and if private i like to use a combination of purchase price and Fairfax value (usually applying a hair cut to Fairfax valuation if it looks frothy). 

Now having said all of the above i am completely ignoring all of the many examples of where Fairfax is doing good to exceptional things and building value for shareholders (particularly on the insurance side of things). Or where it owns companies that are doing very well. Often this 宋alue is not captured in BV.

So weaving it sll together, i am likely not being fair to Fairfax in wanting to discount BV when coming up with a fair valuation. As time goes by and i learn more (informed by what the company does and says) i will revise my thinking accordingly :-)
« Last Edit: November 22, 2020, 02:49:06 PM by Viking »

petec

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Re: Fairfax 2020
« Reply #694 on: November 27, 2020, 04:56:09 AM »
Thanks.

Out of interest what do you think Atlas has done to/with APR since purchase? As far as I can see they have
- cut costs.
- deployed assets on the short term Mexicali contract, but I think this was in place since they bought it.

I asked the same question of Parsad on the Atlas thread and he replied with a long extract from the q2 call. But apart from the cost cutting, everything they discussed on that call was either in place before they bought APR or was rather vague conjecture about future plans.

Assuming they have found genuine fat, cutting costs is very positive and frees up capital for reinvestment, so credit for that. But apart from that I don't think they have done anything with APR yet.
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petec

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Re: Fairfax 2020
« Reply #695 on: November 27, 2020, 05:03:57 AM »
More directly on the book value points:

1) How do you derive the market value of Bangalore?

2) The only bit of your reasoning I disagree with is Digit. If 10% sells for X, it is reasonable to think that a control stake might sell for >X. The world is paying amazing multiples for tech growth these days.
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drzola

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Re: Fairfax 2020
« Reply #696 on: November 27, 2020, 05:43:15 AM »
I was fortunate or unfortunate to be present in Bangalore airport when a group of us die hard Koolaid drinkin Fairfaxer's were dining in Jan 2018 and an employee not the CEO gave us a 1 min PowerPoint pitch of Digit and most were displeased with his foresight/insight's tho, I was extremely impressed ( he was very young as in a 20's aged digital imprinted  person and most likely knows his future customer's better then most their in my opinion ) but WTF do I even know here.

Stay Safe all whilst Covid 19 peak trough is being witnessed currently in NA maybe!

StubbleJumper

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Re: Fairfax 2020
« Reply #697 on: November 27, 2020, 07:43:53 AM »
I don't want to create a jinx or anything, but Blackberry shares are trading at US$6.18 this morning.  The conversion privilege of the $330m debentures is at least temporarily in-the-money.  Lots of small pieces of good news over the past three weeks.


SJ

Bryggen

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Re: Fairfax 2020
« Reply #698 on: November 27, 2020, 09:11:44 AM »
Unrelated question: was FFH ever part of the TSX 60 and recently removed?
Thanks

ourkid8

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