National Bank Financial is reaffirming Fairfax Financial Holdings Ltd. as a “top pick” after reviewing the company’s full fourth quarter financial statements, released on March 8th, and CEO Prem Watsa’s letter to shareholders.
The bank’s “outperform” rating and C$2,000 price target on Fairfax remain unchanged.
“Fairfax is our 2024 Top Pick given i) solid operating income outlook, ii) valuation upside, and iii) potential index inclusion catalysts,” said National Bank analyst Jaeme Gloyn in a note to clients.
Fairfax is not part of the S&P/TSX 60 index. But it is close to being added to it by S&P Dow Jones Indices, which reviews the index’s stock holdings on a quarterly basis, based on a proprietary calculation of market capitalization that excludes insiders.
“Overall, we view the [quarterly] results favorably given the combination of 1) 7% q/q increase in book value per share on a 25% return on equity quarter; 2) significant operating income from the P&C insurance beat on a strong combined ratio of ~90%; and, 3) run-rate interest and dividend income of $2.0 billion,” Mr. Gloyn said.
The analyst also said Fairfax management provided “ample commentary” in response to allegations made in Muddy Water’s report in early February against the company. Muddy Waters, which shorted Fairfax stock, claimed the company manipulated asset values. Fairfax denies the allegations.
Mr. Gloyn also provided several takeaways from this year’s CEO letter: “1) Overall, CEO Prem Watsa struck an upbeat tone in his annual letter to shareholders. Notably, the number exclamation points - a sign of excitement - totaled 57 this year (!) which compares to 34 last year and 27 in 2021. 2) Fairfax reiterated they expect sustainable $4 bln in annual operating income (up from $3 bln), consisting of $2 bln from interest and dividend income, $1.2 bln of underwriting profit and $750 mln from associates and non-insurance. We agree with management’s additional commentary on the Q4-23 conference call suggesting this expectation is conservative. 3) We found additional colour on investments in Poseidon (expected to generate $400 mln in net earnings in 2024 and $500 mln in 2025) and Eurobank (~$1.2 bln recurring earnings in 2023 and intiating a dividend in 2024) as confidence inspiring for non-insurance income. 4) Market values of associates and consolidated investments exceed carrying values by ~$1.0 bln (or ~$43 per share), reflecting several businesses carried at single digit multiples of FCF and/or below book value.”