Fairfax India new issue

[Viking]

If the US$ is indeed at the start of a multiyear decline then this should be good for EM currencies. What has been a decade long headwind could become a multiyear tailwind.

[bizaro86]

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.

 

Why would OMERS renegotiate? They get a free look at the upside, and FIH makes them whole with a bigger ownership if the IPO doesn't price out.

 

In many ways, the deal could be spectacular for them as written. If things stay slow for the duration of their option, they will end up with a bigger percentage of an irreplaceable infrastructure asset at a deep cyclical low price.

[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.

 

Why would OMERS renegotiate? They get a free look at the upside, and FIH makes them whole with a bigger ownership if the IPO doesn't price out.

 

In many ways, the deal could be spectacular for them as written. If things stay slow for the duration of their option, they will end up with a bigger percentage of an irreplaceable infrastructure asset at a deep cyclical low price.

Because the ratchet clause only kicks in if the valuation goes below 1.3B in an IPO which in very unlikely even in a worst case scenario. Also OMERS 'upside' in a worst case scenario is capped -

 

"

It is intended that Anchorage will be listed by way of IPO in India by December 2021 using commercially reasonable

efforts, subject to regulatory approvals and market conditions. The third party investor will receive incremental

shares of Anchorage to compensate for the amount by which the valuation of Anchorage upon closing of the IPO is

below approximately 91.6 billion Indian rupees (approximately $1.3 billion at period end exchange rates). For any

IPO valuation lower than approximately 70.3 billion Indian rupees (approximately $1.0 billion at period end

exchange rates), the third party investor will receive no additional incremental shares of Anchorage.

"

 

Given that all the publicly traded airports ( except china) are down 30-50% , OMERS can ask for a lower valuation around 1.8 - 2B

[bizaro86]

Fairfax got 9.5  billion rupees ($134 MM) for 11.5% of Anchorage. The 2.7 billion is the implied valuation of BIAL, not the valuation FIH got for Anchorage. So the valuation of anchoeage is $1.165 B.

 

https://www.globenewswire.com/news-release/2019/12/16/1960880/0/en/Fairfax-India-Sells-Minority-Position-of-Anchorage-Infrastructure.html

 

FIH has to take Anchorage public at a 1.3 B valuation, or OMERS gets more shares. The embedded put option OMERS got as part of the deal was in the money when they wrote it. If you assume BIAL is less valuable now (likely) then it is more in the money.

[valueinvesting101]

Fairfax India Announces Intention to Make a Normal Course Issuer Bid

 

period commencing September 30, 2020 and ending September 29, 2021, of up to 3,500,000 Subordinate Voting Shares.

 

Fairfax India may purchase up to 15,429 Subordinate Voting Shares on the TSX during any trading day. It will take around 225 days to purchase close to 3.5 million shares. Repurchases could be around $21-30 million. Less than 0.3% of current market cap. Seems insignificant except to signal cheap price.

 

https://www.fairfaxindia.ca/news/press-releases/press-release-details/2020/Fairfax-India-Announces-Intention-to-Make-a-Normal-Course-Issuer-Bid/default.aspx

[obtuse_investor]

This is standard annual filing. Fairfax financial did a similar one at the same time.

[hobbit]

https://www.business-standard.com/article/economy-policy/cargo-traffic-at-bangalore-international-airport-rises-139-in-h1-fy21-120102101095_1.html

[wondering]

In the similar vein as Hobbit's post, here are some fun stats from Visual Capitalist measuring  Top City Destinations.

 

https://www.visualcapitalist.com/the-100-most-popular-city-destinations/

 

Interestingly, Bangalore comes in last.  Delhi, Mumbai, Agra, Chennai, Jaipur, and Kolkata all outrank Bangalore.  My point here is that Bangalore is growing quickly, and will probably surpass all but Delhi and Mumbai is the next few years.

 

[Xerxes]

My feeling is that, as great as a long term investment as the airport is, in the short-medium term, market would value a gain on BV based on fair value assessment of a given illiquid investment much lower than it would value a gain in one of FIH holding that are trading in the stock market.

Namely these four financial names:

 

IIFL Finance

IIFL Wealth

IIFL Securitie

CSB Bank

 

The first three are more or less flat since March, while CSB Bank had really good run since March (mostly front-loaded).

 

In aggregate these had $634 million in market value as of Dec 2019, out of ~$3 billion overall investments, based on Annual Letter in March.

By April 1 2020, these four bad boys had shrunk to a total market value of $390 million and them moved upward toward $472 million by close Q2 (June 30) out of total ~$2.7 billion of investments (liquid and illiquid).

 

So, the four financials had always something between 18-20% of the total investments in Dec 31, 2019 and the same six months later.

Whereas the Airport's fair value had 45% weighing of the total investments in Dec 31, 2019, and very close to 50% as end of Q2.

 

I don't know much about airport valuations and little about financial services, either, but when the overall blended book value goes down, if one entity (airport)'s % of that blended book value goes up relatively and if it is assessed through fair value as oppose to the market, perhaps market will express its displeasure of that fair value assessment by discounting Fairfax India's stock, since it couldn't do it directly through that fair value assessment.

 

But, that being said, the stock markets displeasure with the discount is CRAZY : 

 

Market value of FIH at $1.18 billion.

Book value at $2.8 billion and within that the airport is valued at $1.3 billion. 

 

I think, once the four financials start roaring ahead, then you will see that flow through FIH stock price, given that.

 

-Market seem to prefer an exchange determined price a whole lot more than fair value assessment done privately.

-Financials will be seen as bellwether on the rest of the economy.

 

Where are all those self-declared long term holders that can't get enough of being a long term holder only when something hits the front page of Wall Street Journal or Financial Times ?

 

[Xerxes]

 

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

EDIT: Another way to look at, not from the largest asset (i.e. airport) point of view, but through all the publicly traded names.

if stock market is valuing correctly, then the $744 million is correctly valued. That leaves $436 million of market valuation for all the private entities that is valued on the book for $1.9 billion.

 

Take a discount for so-called hedge-fund like fees, illiquidity, emerging market etc. are the private assets really a quarter of their value on the books.

 

End of Q2:

$744 million of liquid public assets out of total $2.7 billion (public and private).

27% of total

 

End of Q1:

$591 million of liquid public assets out of $2.7 billion (public and private).

22% of total

 

End of Q4 (last year):

$877 million of liquid public assets out of $3.04 billion (public and private).

28% of total

[valueinvesting101]

I think valuation for CSBBank (P/B=2.03) is stretched compared to other private sector banks in India such as Axis Bank(P/B=1.67). It might be due to low float of CSBBank leading to mispricing.

 

I thought break up of IIFL was pre-cursor to merger of IIFL Finance with CSBBank but it seems valuations are NOT conducive for deal. Pure NBFC will be challenged going forward compared to merged CSBBank + IIFL finance. May be deal will happen in 2021 when COVID impact is clear.

[ICUMD]

Trading more than 50% discount to BV.

 

What's not so clear is the profitability - certainly the airport (along with the other entities) is taking a clear financial hit.

As the operator of the airport on a lease, it may take 2 yrs for profitability to return.

 

Now as I understand it, Fairfax India has a regulated rate of return of 16%. 

What I'm not sure of is how they plan to increase the user development fee to recoup the lost income.

They also have significant loans for the development of T2 which I understand is proceeding as planned.

 

On a positive, the flight volumes seem to be returning.

[Parsad]

Trading more than 50% discount to BV.

 

What's not so clear is the profitability - certainly the airport (along with the other entities) is taking a clear financial hit.

As the operator of the airport on a lease, it may take 2 yrs for profitability to return.

 

Now as I understand it, Fairfax India has a regulated rate of return of 16%. 

What I'm not sure of is how they plan to increase the user development fee to recoup the lost income.

They also have significant loans for the development of T2 which I understand is proceeding as planned.

 

On a positive, the flight volumes seem to be returning.

 

Domestic flights are returning somewhat to normal.  So they hit 70M users a couple of years later than expected.  You lose 2 years of profitability, but that airport is state of the art, with fantastic retail space, and Fairfax has the rights to develop the land around it.  I've seen the airport and toured it first hand...it will prove to be one of the best investments Fairfax made long-term.  And Banglore as an IT hub isn't going anywhere...it's also become one of the more desirable cities to live and work in...not dissimilar to San Jose.  Cheers!

[Parsad]

In the similar vein as Hobbit's post, here are some fun stats from Visual Capitalist measuring  Top City Destinations.

 

https://www.visualcapitalist.com/the-100-most-popular-city-destinations/

 

Interestingly, Bangalore comes in last.  Delhi, Mumbai, Agra, Chennai, Jaipur, and Kolkata all outrank Bangalore.  My point here is that Bangalore is growing quickly, and will probably surpass all but Delhi and Mumbai is the next few years.

 

That list isn't truly accurate.  Vancouver is one of the most desirable, livable cities in the world...constantly ranked in the top 5, let alone top 10...and it sits 69th.  Banglore is much cleaner than Delhi, more modern and is the high-tech hub of India.  Cheers!

[Xerxes]

From Brookfield Infrastructure Q3 investor call:

 

 

"Naji Baydoun

Okay. That's very helpful. And just maybe going back to the airport or air travel sector. How comfortable are you pulling the trigger on, let's say, an airport or an airline at this point. Would you say you're still in the early stages of looking at these types of opportunities? Or would you be willing to make an investment right away if the right opportunity came up tomorrow?

 

Sam Pollock

I guess, I mean, there's a number of considerations that you have to take into account. Obviously, value being the most important one, but the short answer is we would execute tomorrow if the right opportunity came up. The right asset for the right price. So we're not waiting to see what happens with air travel."

[changegonnacome]

Karthikpm: There does now appear to be a US based OTC ticker for Fairfax India:

 

  http://www.morningstar.com/stocks/PINX/FFXDF/quote.html

 

I wonder if this is an ADR?

 

Interactive Brokers doesn't seem to list FFXDF though, only FIH.U.

 

Theoretically, does anyone know if buying an OTC stock instead of a Canadian one might be a way of getting around the potential FPIC tax problem referred to earlier in this thread for US investors?

 

Warmly,

jimjam

 

Digging up the graveyard here - but did anyone ever get full clarity on this - is Fairfax India deemed a FPIC? Built a position over the past few months and came across this wrinkle!

 

If no 100% clarity on & if holding a FPIC in a personal US brokerage account - when selling at a capital gain does the IRS easily flag an instrument as a FPIC......I've a note in with my CPA but suspect there might be knowledge on here

[hobbit]

https://www.business-standard.com/article/finance/explained-how-the-kerala-based-csb-bank-made-a-dramatic-turnaround-120111801497_1.html

 

Essentially -

 

New Mgmt with Fairfax appointed CEO

 

Sacked around 1200 people , average age of employees dropped from 50 to 36, productivity went up . Labour cost to income was 26 % as compared to industry average of 10 . it came down from 26 to 15 % in 1.5 years

 

Cut down on corporate lending , increased focus on retail ( gold ) and SMEs . Had earlier struggled with high NPAs in corporate lending

 

Forecasting growth of 25% and looking to acquire another mid sized bank

 

 

[drzola]

Interesting write up on India vs China

 

https://thegoldstandardsite.wordpress.com/2020/11/30/why-it-may-be-the-wrong-time-to-give-up-hope-on-india/

[wondering]

https://www.youtube.com/watch?v=XiYRYlKteGU&t=1660s

 

Probably only applicable to the hardcore Prem fans and FIH fans.  The above link is virtual conference chaired by Prem regarding the current state India economy (uploaded Nov 12 - with regards to current covid case load and death rate situation this video is already stale-dated)

 

Observations

 

- India economy is growing again

- Prem described Deepak Parekh's HDFC bank as the best bank in India.  What about CSB bank?????

 

 

[Viking]

https://www.business-standard.com/article/finance/explained-how-the-kerala-based-csb-bank-made-a-dramatic-turnaround-120111801497_1.html

 

Essentially -

 

New Mgmt with Fairfax appointed CEO

 

Sacked around 1200 people , average age of employees dropped from 50 to 36, productivity went up . Labour cost to income was 26 % as compared to industry average of 10 . it came down from 26 to 15 % in 1.5 years

 

Cut down on corporate lending , increased focus on retail ( gold ) and SMEs . Had earlier struggled with high NPAs in corporate lending

 

Forecasting growth of 25% and looking to acquire another mid sized bank

 

Here is a link to the story that is not password protected. It is certainly encouraging to read about Fairfax investments that have the wing at their back. Most financials are still trading well below their year end 2019 stock price; CSB Bank is flat which shows nice outperformance.

 

- https://www.rediff.com/business/special/how-kerala-based-csb-bank-made-a-dramatic-turnaround/20201127.htm

[petec]

- Prem described Deepak Parekh's HDFC bank as the best bank in India.  What about CSB bank?????

 

There’s no comparison and I’m glad Prem isn’t deluded enough to think there is!

 

It will be interesting to see what they can do with CSB over the next decade, though.

[Xerxes]

https://www.youtube.com/watch?v=XiYRYlKteGU&t=1660s

 

Probably only applicable to the hardcore Prem fans and FIH fans.  The above link is virtual conference chaired by Prem regarding the current state India economy (uploaded Nov 12 - with regards to current covid case load and death rate situation this video is already stale-dated)

 

Observations

 

- India economy is growing again

- Prem described Deepak Parekh's HDFC bank as the best bank in India.  What about CSB bank?????

 

Thanks for posting. i am pretty sure i wouldnt have come across that on my own.

HDFC even made it on The Economist several times.

 

https://www.economist.com/finance-and-economics/2020/10/29/who-is-the-worlds-best-banker

[hobbit]

Fair to assume Bangalore airport deal with OMERS did not close this quarter ? or they would have provided an update

[TwoCitiesCapital]

https://www.thehindubusinessline.com/companies/prem-watsa-led-fairfax-weighs-bid-for-shipping-corporation/article33465056.ece

 

 

[hobbit]

they are up 150mil + on just their IIFL holdings in the past 1 month