Fairfax Africa (TSX:FAH.U) is an investment holding company whose corporate objective is to achieve long-term capital appreciation while preserving capital by investing in public and private capital markets in Africa and African businesses.
Fairfax Africa was incorporated two years ago, and the company has made six major investments since the initial public offering (IPO), allocating (or committing to allocate) $470 million or 96% of cash proceeds.
During 2018, the company made three new investments: Consolidated Infrastructure Group (CIG), Philafrica Foods (Philafrica) and GroCapital Holdings (GroCapital), and three investments in existing portfolio companies: AFGRI Group Holdings (AGH, formerly AFGRI), Atlas Mara Limited (Atlas Mara) and Nova Pioneer Education Group (Nova Pioneer).
Soon after the initial public offering, the company made the following investments: $32 million in AGH to build bridge facilities, support growth initiatives, acquisitions and capital expenditures in AGH’s agri-services, food processing and financial services businesses; $33.8 million in Atlas Mara to support operational improvements and working capital; $97.0 million in CIG to recapitalize the business, reduce debt and provide resources for growth in exchange for a 49.1% stake in a platform investment in energy infrastructure.
Subsequently, the company made the following investments: $12.1 million in GroCapital to acquire a 35.0% equity interest, $14.0 million in Nova Pioneer to fund the expansion of Nova Pioneer’s schools and student enrollment, and $23.3 million in Philafrica in bridge funding to acquire a 26.0% equity interest. GroCapital used the funds to invest and add more capital to the South African Bank of Athens (SABA).
The company reported a net loss in 2018 of $61 million ($1.05 net loss per Fairfax Africa share) in 2018, which was mainly due to unrealized losses on public company investments and due to currency impact.
Specifically, unrealized losses on the company’s investment in Atlas Mara and unrealized foreign exchange losses resulted due to the weakening of the South African currency.
Book value was down 6.1% year over year. This was offset by interest income on the company’s investment portfolio and realized and unrealized gains on portfolio investments.
Although stock price is down significantly, the intrinsic value of Fairfax Africa has grown since the company’s founding and is much higher than the current stock price. The company finished 2018 with book value per share (BVPS) of $9.61, down 2.15% on a compounded annual basis from the initial public offering in February 2017.
The company completed in June 2018 an equity offering in which Fairfax Africa raised nearly $150 million in cash to offer the ability to take advantage of future capital allocation opportunities.
In the year after the equity offering, the company identified opportunities to make significant investments in Africa as a contrarian play, characteristic of Prem Watsa’s Fairfax Financial and valuation levels moved extremely low for several African companies on a price to book and price to earnings basis.
Fairfax Africa has also been buying back company shares at a significant discount to its intrinsic value. Management appears to act in the best interests of our shareholders and the stock looks ridiculously undervalued.
