Expressing “increasing confidence” in its earnings and book value per share growth outlook, BMO Nesbitt Burns analyst Tom MacKinnon upgraded Fairfax Financial Holdings Ltd. to “outperform” from “market perform” previously.
“Traditionally FFH had a heavy reliance on investment gains to drive EPS and BVPS growth,” he said. “Gains from FFH’s investment portfolio, or gains from sale of its insurance holdings, together accounted for 50 per cent of FFH’s pre-tax including NCI earnings from 2011-2022E. This over-reliance on investment gains (unreliable, lower quality) has historically given us pause.
“But EPS and BVPS growth going forward is derived from much more reliable sources, which improves earnings visibility, and gives us more confidence in growth outlook. For 2023/2024, we see a significantly higher contribution to EPS from operating earnings and earnings from non-insurance associates/subsidiaries helped by higher interest and dividend income as FFH puts a substantial amount of its cash position to work in Q3/22, better underwriting income from continued hard markets, especially for reinsurers, as well as improving earnings from associates/noninsurance holdings, which will rebound on improving market conditions in a post-COVID environment. Together these items, which are of much higher quality than earnings growth driven by investment gains, account for 93 per cent of FFH’s 2023E and 2024E pre-tax earnings (including NCI), versus the 40-50 per cent these items together accounted for over the last ten years. This is clearly a positive.”
Mr. MacKinnon increased his BVPS estimate for the fourth quarter of its fiscal 2023 by 6 per cent (to $754) to reflect “firmer reinsurance markets, improved interest/dividend income on improved investment yields, improved earnings from associates/other non-insurance holdings, and better Q4/22 MTM gains.”
His EPS projection jumped to $108.95 from $73.04 given “an estimated $20 EPS lift from the combination of continued firm markets and better investment income, plus the movement of the estimated $15 per share gain from the Go Digit transaction, which is still waiting for regulatory approval, to Q1/23E from Q4/22E.”
Those changes led him to bump his target for Fairfax shares to $1,050 from $800. The average on the Street is $1,035.95.