Jeffrey Stacey January 2021 - Stacey Muirhead Capital Management - MOI Global
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Disclaimer Stacey Muirhead Capital Management Ltd. (the “Firm”) is not providing investment advice through this material. This presentation is provided for informational purpose only as an illustration of the Firm’s investment philosophy and shall not be considered investment advice or a recommendation or solicitation to buy or sell any securities discussed herein, and does not contain enough information to be considered a recommendation or a research report. As of the date of this presentation the Firm continues to own the securities discussed herein. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. The Firm may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities. The information and any opinions contained herein are as of the date of this material, and the Firm does not undertake any obligation to update them. This material does not take into account individual investor circumstances, objectives, or needs and is not intended as a recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. The Firm does not provide tax advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, investors should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions. By virtue of this publication, neither the Firm nor any of its employees shall be responsible for any investment decision. This confidential presentation contains information that has been compiled, by the Firm, from sources believed to be reliable; however, there can be no guarantee as to the accuracy or completeness of such information. It also contains statements, estimates and projections made by various third party companies with respect to their historical and projected performance. There can be no assurance that such statements, estimates and projections will be realized and actual results may vary materially from those indicated. Further, in any case, the Firm does not represent nor is affiliated with any of the third party companies and other entities named and makes no representations as to the reasonableness of such assumptions or the accuracy or completeness of the information contained herein. These materials are for the confidential use of only those persons to whom it is transmitted. 2
The Stacey Muirhead Process Does it possess outstanding business economics? Does it have honest and capable management? Can it be purchased at an attractive price? GREAT BUSINESS GREAT PEOPLE GREAT PRICE 3
Does it possess outstanding business economics? • High returns on shareholders’ equity • A strong balance sheet with minimal or no debt • Attractive operating and profit margins • Significant brand recognition • Pricing power for its products • Growing revenue and earnings over time • Consistent free cash flow generation 4
Does it have honest and capable management? • “Skin in the game” • Reasonable compensation practices • Measurable pay for performance • Demonstrated integrity • Capital allocation record • Unique corporate culture 5
Can it be purchased at an attractive price? “Your goal as an investor should be simply to purchase at a rational price a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten or twenty years from now.” Warren Buffett 6
My Best Idea for 2021 7
Fairfax Financial Holdings Corporate Overview • Fairfax is a global property and casualty insurance and reinsurance company • Founded in 1985 by V. Prem Watsa • Corporate objective is to compound book value per share by 15% annually over the long term • Fairfax is committed to transparent and complete disclosure to shareholders • Based in Toronto, Ontario 8
Fairfax Financial Holdings A Global Property and Casualty Insurance Platform 9
Fairfax Financial Holdings A Diversified Portfolio of Non-Insurance Businesses 10
Fairfax Financial Holdings Market Data • Current Share Price (12/31) $340.94 * • Shares Outstanding 26,235,991 • Market Capitalization $8.8 B • Book Value/Share (09/30) $442.17 • Dividend/Share $10.00 • Dividend Yield 2.9% * All figures are in USD unless otherwise noted 11
Fairfax Financial Holdings Does it possess superior business economics? 12
Fairfax Financial Holdings The Record (1986 – 2019) Book Value/Share CAGR 19.3% Peer Group * 18.9% Share Price CAGR 17.8% Peer Group * 18.2% * Markel Corporation and Berkshire Hathaway 13
Fairfax Financial Holdings Key Drivers of Value Creation • Insurance Underwriting • Float Generation • Investments (Interest, Dividends, Capital Gains) • Non-Insurance Businesses (Operating Income, Capital Gains) 14
Fairfax Financial Holdings Insurance Underwriting Average Period Combined Ratio 1986 – 1990 106.7% 1991 – 1995 104.2% 1996 – 2000 114.4% 2001 – 2005 105.4% 2006 – 2010 99.9% 2011 – 2016 96.0% 2017 – 2019 99.8% 2020 – YTD 98.6% 15
Fairfax Financial Holdings Float Generation Average Cost Average Long Term Float (Benefit) Canada Treasury Year (in $ Millions) of float Bond Yield 1986 22 (11.6)% 9.6% 2009 9,429 (0.1)% 3.9% 2019 20,150 (2.0)% 1.8% Weighted average last ten years (1.0)% 2.5% Fairfax weighted average financing differential last ten years: 3.5% 16
Fairfax Financial Holdings Float Generation Total Float Float (in $ Millions) per Share 1985 13 $ 2.5 1990 164 30 1995 653 74 2000 5,877 449 2005 8,757 492 2010 13,110 641 2018 22,718 834 2019 22,379 834 17
Fairfax Financial Holdings Reserve Development Reserve Redundancy Year (Combined Ratio Points) 2020 – 9 months 2.7 pts 2019 3.8 2018 6.8 2017 5.1 2016 8.5 2015 7.8 18
Fairfax Financial Holdings Insurance Underwriting-Key Takeaways • Insurance rates are skyrocketing! • Net premiums written increased 12.6% in Q3 and 9.4% YTD • COVID losses of $536 million YTD (60% are IBNR) • “All-in” combined ratio of 98.6% YTD • “Core” combined ratio of 89.2% YTD • Favourable reserve development continues (2.7% in 2020) 19
Fairfax Financial Holdings Investments Average Total Period Return on Investments 1986 – 1990 10.4% 1991 – 1995 9.7% 1996 – 2000 8.8% 2001 – 2005 8.6% 2006 – 2010 11.0% 2011 – 2016 2.3% 2017 – 2019 5.6% Since Inception 8.0% 20
Fairfax Financial Holdings Investments – Key Equity Portfolio Holdings Ownership Price Price Gain/Loss Name (in millions) (09/30) (12/31) (in $ millions) Atlas (shares/warrants) 150.3 $8.94 $10.84 $285.6 BlackBerry (shares/converts) 101.7 $4.59 $6.63 $129.9 Eurobank 1,159.3 €0.38 €0.58 $281.6 Kennedy Wilson 13.3 $14.52 $17.89 $44.8 Quess 47.6 ₹412.60 ₹537.80 $81.5 Resolute Forest Products 30.6 $4.48 $6.54 $63.0 Stelco 13.0 $11.36* $22.73* $147.8 Total $1034.20 Per Share $39.42 * in CAD 21
Fairfax Financial Holdings Investments – Majority Interests Ownership Price Price Gain/Loss Name (in millions) (09/30) (12/31) (in $ millions) Dexterra 31.8 $5.06* $6.54* $47.1* Fairfax India 51.7 $6.84 $9.60 $142.7 Helios Fairfax 36.9 $3.02 $5.25 $82.3 Recipe Unlimited 27.1 $9.87* $16.75* $146.6 Thomas Cook India 248.2 ₹27.85 ₹47.80 $67.7 Total $486.4 Per Share $18.53 * in CAD 22
Fairfax Financial Holdings Investments – Fixed Income Portfolio September 30, 2020 Due in 1 year or less 5,418.3 91% Due after 1 year through 5 years 10,025.2 Due after 5 year through 10 years 1,016.4 Due after 10 years 504.3 16,964.20 23
Fairfax Financial Holdings Strategic Monetization Program • Davos Brands sale to Diageo • Riverstone Europe sale to CVC • Easton Baseball sale to Rawlings 24
Fairfax Financial Holdings Investments - Summary • The fixed income portfolio has a short duration • Equity Investment Portfolio is much improved • Majority Investment prices are much improved • Strategic Monetization of Private Investments is ongoing 25
Fairfax Financial Holdings Financial Position – September 30, 2020 Consolidated Adjusted Holding company cash and investments (net of short sale and derivative obligations) 1,095.9 1095.9 Borrowing – holding company 5,440.7 5,440.7 Borrowing – insurance and reinsurance companies 1,076.0 1,076.0 Borrowing – non-insurance companies 2,132.9 – Total debt 8,649.6 6,516.7 Net debt 7,553.7 5,420.8 Common shareholders’ equity 11,600.8 11,600.8 Preferred stock 1,335.5 1,335.5 Non-controlling interests 3,450.1 1,389.5 Total equity 16,386.4 14,325.8 Net debt/total equity 46.1% 37.8% Net debt/net total capital 31.6% 27.5% Total deb/total capital 34.5% 31.3% 26
Fairfax Financial Holdings Does it possess superior business economics • Superior long term growth in book value/share • Profitable insurance underwriting • Consistent Float Generation • Conservative Reserving • Excellent Long Term investment portfolio performance • Strong Financial Position 27
Fairfax Financial Holdings Does it have honest and capable management? 28
Fairfax Financial Holdings • Prem Watsa currently owns 1,542,880 Fairfax common shares • Prem Watsa personally purchased an additional 482,600 shares in June for $149 million • Annual compensation for Prem Watsa fixed at $600,000 with no options or bonuses • Fairfax capital allocation program includes an active share repurchase program (2,068,409 shares since Q4/17) • Excellent board of directors • Fairfax Guiding Principles are a unique part of the corporate culture 29
Fairfax Financial Holdings Does it have honest and capable management • “Skin in the Game” • Reasonable compensation practices • Capital allocation record/Share repurchases • Unique corporate culture 30
Fairfax Financial Holdings Can it be purchased at an attractive price? 31
Fairfax Financial Holdings Current Price $340.94 2020 Price Return -27.96% Book Value/Share $442.17 Price/Book Value 0.77 X Peer Group 1.29 X Dividend Yield 2.9% 32
Fairfax Financial Holdings What if? 33
Fairfax Financial Holdings What if? Valuation Return * • Fairfax trades at current book value/share 29.7% • Fairfax trades at current peer group book value/share multiple 67.3% • Fairfax grows book value/share by 15% and trades at book value/share 49.2% • Fairfax grows book value/share by 15% and trades at peer group book value/share multiple 92.4% * without dividends 34
Fairfax Financial Holdings What if? • Current Market Price $341 • Current Book Value Per Share $442 • Annual Compounded Growth Rate 15% • Book Value Per Share in 5 Years $899 • Market Price/Book Value Multiple 1.29 x • Market Price in 5 Years $1,147 • Annual Compounded Rate of Return 27.5% 35
Fairfax Financial Holdings What if? $100 + EPS 36
Fairfax Financial Holdings Summary Great Business Great People Great Price 37
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