Valuation of FIH.U?How to Value FIH?
As noted by Prem Watsa in his recent letter to shareholders,
the book value is the metric he applies to measure and only 3/8 of the securities are publicly traded (?upside to the remainder as this is conservative, and undervaluing these companies given the tremendous growth seen thus far)
So we are trading at a BV of ~1.17(Which seems very low for a company posting growth and numbers in line with what we have seen, and headed by Watsa who has compounded FFH in the order of 20% annually, in a Buffett like manner, since 1985.
But we could ascribe significantly higher valuation using conservative measures:
In terms of valuations, by applying a below market equivalent multiple of 12-15 times, would produce a fair value in the range of $35.28-44.1 (comprised of 12-15*2.94)
Interestingly (for all its caveats) a DCF produces a FMV of 31.46 - assuming a conservative growth rate of 5%, terminal growth rate of 4% x 10 years, and a discount rate of 12%- still with its caveats these are very conservative numbers given what we know of Prem Watsas exemplary track record)
I recognize the Columbia school dislikes this measure-but I didn’t have the time for a EPV calculation-later!
But... this still seems very conservative to me in light of the data and Prem Watsas record(OK I am a huge fan of Prem-full disclosure)
Fiscal 2017 Highlights:
-Fairfax India’s common shareholders’ equity increased $1.1 billion or 98% to $2.1 billion in 2017.
- Book value per share increased by 41.1% in 2017, from $10.25 at the end of 2016 to $14.46.
Looking deeper:
2017 2016 2015 CAGR(1) Income 609,670 128,604 65,251 Net earnings 452,509 107,825 40,939 Return on equity 28.2% 10.3% 4.0% 14.2%(2) Total assets 2,672,221 1,303,497 1,025,451 38.9% Investments 2,635,726 1,095,569 978,569 40.5% Common shareholders’ equity 2,132,464 1,075,446 1,013,329 29.1% Book value per share – before performance fee $ 15.24 $ 10.25 $ 9.50 17.1% Book value per share – net of performance fee $ 14.46 $ 10.25 $ 9.50 15.0%
Source: https://www.fairfaxindia.ca/investors/Chairmans-Letters-to-Shareholders/default.aspx
Also EPS grew from 1.01 to 2.94 (From the press release)
With an ROE of 14.2%, and CAGR of 29.1% on shareholders equity-should we not give added value for growth?
Lynch used PEG ratio as a valuation metric for determining the relative trade-off between the price, EPS and the company's expected growth, to accommodate for higher PEs in a growth stock.
Yet, here we have a single digit PE ratio!
Unless I have this wrong, there are multiple indicators that this stock is underappreciated by the market, and at some point, it should be significantly higher for a company with a higher growth rate and these strong fundamentals in an exciting growing economy like India.
So let me go off piste-based on Watsas track record, the fact the book value is conservative, and given expected growth of book value- I think it is reasonable to see a book value of 30-40 within 5 years, and a share price well north of that.
What do you think?
Am I off base?
Disclosure-I am independent investor, and very very long FIH, and have loaded up in the past month, and a fan of PW