Fairfax India new issue

[ICUMD]

Correct me if I'm wrong, but since they get a regulated 16% return on aero operations, they will never suffer loss on core operations.

[petec]

I have not scoured the AR yet. Does anyone know if the "ratchet" in the OMERS deal includes a deadline for an IPO? because

a) if not then the ratchet is somewhat irrelevant.

b) if so, and it is any time soon, then FIH are going to give away a lot of BIAL shares. Coronavirus and full IPO valuations are not compatible.

[hobbit]

I have not scoured the AR yet. Does anyone know if the "ratchet" in the OMERS deal includes a deadline for an IPO? because

a) if not then the ratchet is somewhat irrelevant.

b) if so, and it is any time soon, then FIH are going to give away a lot of BIAL shares. Coronavirus and full IPO valuations are not compatible.

 

on the call they said next 3 years

[Gopinath]

Here is a recent write up of mine.

 

http://valuealert.blogspot.com/2020/05/attractive-opportunity-to-participate.html

 

[Xerxes]

Great read on your blog. Some comments about FIH as a whole:

 

- discount to BK although provides a margin of safety is not really relevant IMO, since it has the fees, it is in emerging market etc. it will always be there. Unless one is a strategic investor who has the ability to make changes on the company structure, the investment based on the discount spread isn't justified. Book value growth is the key.

 

On the airport

- haven't seen anyone that follows FIH to yet make a comment on this: unlike say the airport in Amsterdam that thrives from international flow through, the Bangalore airport has a huge domestic market. Is that a plus ? definitely it cannot be a negative.

 

On the overall structure

- FIH feels like a locked-in investment account that you cannot add money into it. i.e. FIH doesn't have a steady cash generator within to provide additional funds for future investment. I am not talking about paper earnings that of course is there. I feel that is something that is missing. That means future cash flow in for investment needs to be either via asset-sale or equity offering; both of them really bad option, if you want to be taking advantage of a distress market in a counter cycle move.

 

So I am thinking what stops, FIH to raise funds (ala Brookfield) with third-party investors; and deploy those funds and charge them management fees. This way FIH future potential can tilt from purely being an asset-appreciation vehicle to one that also collects actual cash in terms of management fee on top of being asset-appreciation vehicle while deploying a larger check (i.e. investment prowess).

 

[Gopinath]

Discount will be there may be a popular sentiment (otherwise it won't trade at a huge discount now), but how much is the question relative to their compensation? The current discount is too large, whichever way you want to capitalize that fee/incentives.

 

Out of 700 planes (both arrivals and departure) daily, ~100 of them are international. Its a small pie relative to the domestic, it collects more than 4 times average fee per passenger relative to the domestic customer. It will eventually grow both the customers and fee per customer over time as they are doubling the capacity in the terminal and runway.

 

They can bring in cash as they wish, plenty of ways to monetize these assets partially. They are in the process of splitting 'Fairchem'. They are considering taking the airport public when the valuation and opportunity makes sense. Although the profits are not streamlined up to the FIH, each business stands on their own cash profits and growing without needing support from FIH.

 

I would be surprised if they don't raise money from other investors and get paid somehow if they prefer that over time. Current possibilities seem difficult as both the discount in asset value vs assets in the holding company. It would be a stretch to think FIH will become an asset light fee generating entity with other people's capital in the near future.

[hobbit]

https://www.vccircle.com/canadian-fund-likely-marks-down-bangalore-airport-valuation-as-it-takes-bigger-stake/

[Tompety03]

Thanks for posting.  Hit the paywall - any details on the deal in the article? I guess we will find out when Q2 report is out in a couple weeks.

[StubbleJumper]

Thanks for posting.  Hit the paywall - any details on the deal in the article? I guess we will find out when Q2 report is out in a couple weeks.

 

 

We might not find out at Q2 either.  The article appears as if it covers OMERS requirement to mark down its investment in BIAL.  If OMERS does it, likely FIH will need to conduct an impairment assessment to evaluate whether the value of the airport is permanently impaired and ought to be marked down.  I am guessing that Fairfax would prefer to not take an impairment, and in fairness, for such a long-lived asset, it may be a bit pre-mature to decide that its value is permanently impaired.

 

 

S

[Tompety03]

Got it - the headline made it seem like they were buying more at a lower valuation and I assumed that would require a revision by Fairfax.

 

Chris

[SharperDingaan]

Assume FFH does NOT record the impairment - subject to an annual future MM impairment charge.

It is not unusual for different owners of the Toronto DT towers to have different valuations on their ownership portions of the same tower (precedent)- and just reflects their differing future opinions. IFRS accounting is accepting as long as the opinion and valuation is documented - and there is annual impairment testing (valuation model re-run with current data), if the opinion difference is material.

 

SD

 

 

[Xerxes]

It is no different than two different investors having a different opinion of a publicly traded stock, thereby moving the stock.

 

In illiquid assets samething happens but at a very slow speed paced by quarterly releases.

[Tompety03]

For sure - that makes sense that people can use their own internal valuation models absent a transaction.  But if Fairfax just sold more of the airport to Onex at a certain valuation, don't they have to adjust their mark to that valuation?

 

Chris

[Xerxes]

I am no expert.

 

I think the marked down ought to happen.

But marked down is not as bad as impairment that is typically not reversed back with a mark up.

[bizaro86]

For sure - that makes sense that people can use their own internal valuation models absent a transaction.  But if Fairfax just sold more of the airport to Onex at a certain valuation, don't they have to adjust their mark to that valuation?

 

Chris

 

Did you mean OMERS? Fairfax already marked the airport stake up to the value OMERS paid for it. That's a bad mark (imo) because they effectively guaranteed OMERS the price - if they don't IPO it at a certain valuation, OMERS gets more shares to make up the difference.

[SharperDingaan]

It will be a year-end 'discussion' item with their auditor.

One side will argue that it was isolated, and correctly accounted for via the loss recorded on date on sale. As a result of the sale, the valuation premise of the remaining stake was further strengthened - hence an impairment write-down is not required (opinion). The other side will most likely concur - subject to a disclosure note that outlines the material facts of the transaction. Reader makes his/her own decision.

 

Comes back to the trust, vision, and informational reporting thing.

One is either OK with this kind of thing, or not.

 

SD

 

[Parsad]

Why Silicon Valley's Biggest Companies are Investing Billions in India:

 

https://www.cnn.com/2020/07/17/tech/google-facebook-india-investment-jio/index.html

 

Cheers!

[wondering]

https://economictimes.indiatimes.com/industry/banking/finance/banking/fairfax-backed-csb-bank-weighs-buying-out-other-old-private-banks-to-expand-its-balance-sheet/articleshow/77093694.cms

 

Sorry, besides the headline, the rest of the article you have to login. I didn't bother, but it's interesting to see that CSB is looking to expand.

[Xerxes]

Sensex has largely snapped back from 27K lows in march to 38K, i am guessing fuelled by Reliance Industries*, but not yet surpassing its pre-pandemic highs.

Fairfax India, however, has barely recovered in fact badly lagging the market, probably held down on the weight of its exposure on financial services. I am not too sure if Sensex is the right benchmark, perhaps there is another.

 

i am guessing the financial services where FIH had invested has led the downturn for FIH through their mark to market accounting in Q1-Q2, but as financials their cyclical recovery is probably lagged as well. So the snapback hasn't really happened. That said, IIFL Securities seemed to have recovered better, i am guessing due to trading and issuance of fixed-income securities. CBS bank seem to have recovered very well. In fact it had the most mark to market decline in Q1 and the biggest bounce back. 

 

As for the rest that are mostly illiquid investments, I think FIH has more leeway on the magnitude of impairments (if required) and can argue for patience, which is fine. The underline portion is notable as it shows a continuous decline on some holdings even through Q2. One potential tailwind for the whole lot is the potential weakness in the US Dollar against the rest.

 

*if only Jack Welch has built General Electric like Reliance Industries.

 

 

---------------------------------------------

Q1

Highlights for first quarter of 2020 included the following:

 

Net change in unrealized losses on investments of $274.3 million, principally from decreases in market prices of the company's investments in the public companies CSB Bank ($105.4 million), IIFL Finance ($77.1 million), Other Public Indian Investments ($37.3 million), IIFL Wealth ($22.4 million), Fairchem ($16.4 million), IIFL Securities ($11.8 million) and 5paisa ($7.6 million), and a decrease in the fair value of the company's private investment in Sanmar ($8.7 million), partially offset by an increase in the fair value of the company's private investment in NSE ($13.5 million).

Full recovery of the performance fee of $47.1 million, which was accrued to the benefit of Fairfax Financial Holdings for the period from January 1, 2018 to December 31, 2019. The performance fee, if any, will only be finally determined by December 31, 2020 at the end of the three year measurement period.

At March 31, 2020 common shareholders' equity was $2,178.9 million, or book value per share of $14.37, compared to $2,577.9 million, or book value per share of $16.89, at December 31, 2019, a decrease of 14.9%, primarily related to a net loss during the first quarter of 2020 and unrealized foreign currency translation losses as a result of the weakening of the Indian rupee relative to the U.S. dollar.

 

Q2

Highlights for second quarter of 2020 included the following:

 

Net change in unrealized gains on investments of $70.5 million, principally from increases in market prices of the company's investments in the public companies, including CSB Bank ($65.9 million), Fairchem ($37.1 million), IIFL Securities ($14.0 million), 5paisa ($10.5 million), IIFL Wealth ($5.2 million), and Other Public Indian Investments ($11.7 million) partially offset by a decrease in the fair value of the company's private investments in Sanmar ($56.8 million), NSE ($14.5 million), and NCML ($7.7 million).

On June 26, 2020 the company extended its $550 million secured term loan facility with a syndicate of Canadian banks to June 28, 2021 with an option to extend for an additional year.

At June 30, 2020 common shareholders' equity was $2,220.0 million, or book value per share of $14.75, compared to $2,577.9 million, or book value per share of $16.89, at December 31, 2019, a decrease of 12.7%, primarily related to a net loss during the first six months of 2020 and unrealized foreign currency translation losses as a result of the weakening of the Indian rupee relative to the U.S. dollar.

 

---------------------------------------------

 

[valueinvesting101]

I find that private investment valuation hasn't changed much except Sanmar and NSE.

Following note from the latest quarterly report is interesting:

 

updates to estimated airport tariffs for the third control period commencing in BIAL's fiscal year 2022 to reflect a recovery of lost return during the lockdown and subsequent period;

 

I believe BIAL gets to update user development fees (UDF) charged per passenger from AAI based on the expected equity return during the period and actual returns achieved during the period last period.

 

If UDF is adjusted in 2022 to reflect lost of revenue/returns due to COVID then there should not be much impact for the airport valuation. This could the reason for 0.1% reduction in BIAL valuation vs. ~15% reduction in Sanmar valuation.

 

Any more details about impact of COVID on BIAL valuation and UDF collection in the future?

[ICUMD]

Airport revenue, to my understanding, is based on aero and non aero revenue.  The aero component is regulated via UDF modulation during the control period to provide 16% return on depreciated investment.  Non aero revenue is not regulated and will take a large hit. 

 

I don't know the proportion of each, but it is likely the value of the airport is currently impaired.  Oth, population continues to increase and there is talk of building a second airport. 

 

For the patient investor, I think this will turn out ok. Covid will likely reach a baseline in 12-24 months. The airport is not going anywhere.  NAV I think is $12-14.  50 % discount right now.

 

[Viking]

BV at June 30 for FIH was $14.75. I updated my tracking sheet for FIH (see below) and their publicly traded equities are up about $90 million so far in Q3. Sept 30 BV could be in the $15.25-$15.50 range. This would bring BV to about 90% of where it was Dec 31 ($16.89).

 

Shares are trading today at $7.50, which puts current P/BV < 0.50

For reference, Dec 30 shares were trading at $12.90; P/BV = 0.75

 

So BV is down about 10% and the shares are down 40%. What gives? Their largest holding is an airport (BIAL). We may get some news on this front in the next couple of weeks as the Anchorage transaction is supposed to be completed by Sept 30 (if I understand things correctly).

 

In the age of Covid what is an airport worth today? FIH investors are answering very loudly: 'not very much'. FIH shares look very cheap and that is likely primarily driven by BIAL.

 

For those who think shares are undervalued the question is one of timing:

- buy today when you are pretty certain the shares are cheap but may stay that way for another 12-18 months (if vaccine's fail)

- wait for the catalyst to happen (vaccine's are announced) and possibly buy then

 

It is interesting to read what BIAL is doing. My guess is getting metro connectivity with Bangalore will make BIAL more valuable in the coming years and decades.

 

Here are a few articles:

 

Establish 4.95 km airport section of the ORR-Airport Metro: this Metro connectivity to BLR Airport, likely to be commissioned by December 2024,  would provide a sustainable and efficient mode of transport to the residents and business commuters from all parts of the city, facilitating the city to realise its economic potential and ease traffic congestion on the roads leading to the Airport.

- https://www.bengaluruairport.com/corporate/media/news-press-releases/public-private-partnership-between-bangalore-metro-rail-corporat.html

 

Summary of 90 Day Trend (June, July, August)

- https://www.bengaluruairport.com/corporate/media/news-press-releases/blr-airport-marks-100-days-of-successful-operations--since-resum.html

 

Cargo Hub

- https://www.bengaluruairport.com/corporate/media/news-press-releases/bial-opens-india-s-first-on-airport-public-bonded-warehouse.html

Fairfax_India_Holdings.xlsx

[hobbit]

BV at June 30 for FIH was $14.75. I updated my tracking sheet for FIH (see below) and their publicly traded equities are up about $90 million so far in Q3. Sept 30 BV could be in the $15.25-$15.50 range. This would bring BV to about 90% of where it was Dec 31 ($16.89).

 

Shares are trading today at $7.50, which puts current P/BV < 0.50

For reference, Dec 30 shares were trading at $12.90; P/BV = 0.75

 

So BV is down about 10% and the shares are down 40%. What gives? Their largest holding is an airport (BIAL). We may get some news on this front in the next couple of weeks as the Anchorage transaction is supposed to be completed by Sept 30 (if I understand things correctly).

 

In the age of Covid what is an airport worth today? FIH investors are answering very loudly: 'not very much'. FIH shares look very cheap and that is likely primarily driven by BIAL.

 

For those who think shares are undervalued the question is one of timing:

- buy today when you are pretty certain the shares are cheap but may stay that way for another 12-18 months (if vaccine's fail)

- wait for the catalyst to happen (vaccine's are announced) and possibly buy then

 

It is interesting to read what BIAL is doing. My guess is getting metro connectivity with Bangalore will make BIAL more valuable in the coming years and decades.

 

Here are a few articles:

 

Establish 4.95 km airport section of the ORR-Airport Metro: this Metro connectivity to BLR Airport, likely to be commissioned by December 2024,  would provide a sustainable and efficient mode of transport to the residents and business commuters from all parts of the city, facilitating the city to realise its economic potential and ease traffic congestion on the roads leading to the Airport.

- https://www.bengaluruairport.com/corporate/media/news-press-releases/public-private-partnership-between-bangalore-metro-rail-corporat.html

 

Summary of 90 Day Trend (June, July, August)

- https://www.bengaluruairport.com/corporate/media/news-press-releases/blr-airport-marks-100-days-of-successful-operations--since-resum.html

 

Cargo Hub

- https://www.bengaluruairport.com/corporate/media/news-press-releases/bial-opens-india-s-first-on-airport-public-bonded-warehouse.html

 

It will also be important to see whether OMERS renegotiates the valuation of the airport or goes ahead with 2.7B. The transaction is supposed to close by the end of Q3 2020.

[ICUMD]

The airport, being a regulated industry that's too important to fail, that all pandemics subside, it follows that any impairment is temporary.  People will fly again. Bangalore population is growing. Covid numbers will abate in 6 mo to 1 yr. Volumes will reach pre covid levels in 2 yrs.  The impairment will be shed when a large buyer sees the underlying value bidding up the share price. 

[petec]

The airport, being a regulated industry that's too important to fail, that all pandemics subside, it follows that any impairment is temporary.  People will fly again. Bangalore population is growing. Covid numbers will abate in 6 mo to 1 yr. Volumes will reach pre covid levels in 2 yrs.  The impairment will be shed when a large buyer sees the underlying value bidding up the share price.

 

+1