Fairfax Financial Shareholder’s Dinner Bob Robotti President & CEO April 8, 2014
Disclaimer 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. 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. Robotti & Company Advisors, LLC or its affiliates 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. Information contained in this presentation has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. This material does not take into account individual client 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. Robotti & Company Advisors, LLC 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, clients 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. 2
About Robotti & Company Advisors • Manage over $700 million in separate accounts and partnerships on behalf of institutional and individual clients • Focus on small-to-mid capitalization equities of misunderstood, neglected, or out-of-favor companies • Established in 1983 by Robert Robotti, our primary focus was on North American investments until 2004 • Expanded in 2005, when Isaac Schwartz launched Robotti & Company’s international investing initiative to apply Robotti & Company Advisors’ investment philosophy to the global equity markets 3
Two Edges Too Many Behavioral Edge We take a longer-term view and have the ability to tolerate losing money before we make it. Leads Us To Informational Edge Analytical Edge Our network of industry relationships, Within the context of a longer-term focus on deep primary research, and perspective and 30+ years of experience, experience serving on company boards, we have the ability to develop a different provides us with more pieces for building conclusion than that of the market. our information mosaic. Our behavioral edge comes from our ability to tolerate losing money before we make it. As a result, our investment process concentrates on understanding the long-term normalized earning power of a business well before the herd, in this case the market, gains interest. 4
Value Investing: A Big Tent Expensive Warren Buffett Valuation “Ideal” Graham and Dodd Cheap Quality Low High “In theory there is no difference between theory and practice. In practice there is.” - Yogi Berra 5
What Is A Good Business A high quality or good business is one that can earn above average returns on capital over a sustained period of time. 6
Economics 101 In a competitive economy, firms that earn above-average returns will quickly attract competition. Competitors emerge and attempt to compete even more efficiently and/or effectively. This places downward pressure on returns. As new competitors continue to enter, demand becomes spread among more participants. Average costs will rise as fixed costs are spread over fewer units sold. Prices fall until returns on capital are driven to a level at or below the cost of capital and economic profits disappear (setting the stage for industry restructuring). 7
Porter’s Five Forces: Four Too Many? Porter Greenwald Rivalry of Rivalry of Competitors Competitors Bargaining Threat of New Power of Entrants Threat of Threat of Bargaining Suppliers New Substitute Power of Products Suppliers Entrants Threat of Bargaining Substitute Power of Bargaining Power of Products Customers Customers Source: “How Competitive Forces Shape Strategy,” Harvard Source: “Competition Demystified,” Bruce 8 Business Review, Michael Porter Greenwald
Companies with Barriers to Entry? • According to Bruce Greenwald: “Without the protection of barriers to entry, the only option a company has is to run itself as efficiently and effectively as possible.” • For companies with barriers to entry, it is most important to execute a strategy that will sustain those barriers. Expensive Warren Valuation Buffett “Ideal” Graham and Dodd Cheap Quality Low High 9
Primary Sources of Competitive Advantages? Type Definition Source • Supply Cost advantages that allow a Lower input costs / Advantages: company to produce and privileged access to deliver its products or resources services more cheaply than • Proprietary technology its competitors Demand • Access to customers that Habit Advantages: rivals cannot match – • Switching Costs customer captivity • Search Costs • Economies of Advantage exists if average Size - but it is important to Scale: cost per unit declines as the remember that pure size firm produces more, leaving alone is not the same thing smaller competitors unable to as economies of scale. compete Source: “Competition Demystified,” Bruce Greenwald 10
OB:SUBC 110.40 NOK / $18.42 USD ( as of 4/4/2013 ) CASE STUDY
Subsea 7 SA (OB:SUBC) Investment Summary Market Capitalization (USD mm as of 4/4/14) • Subsea 7 is a global leader in subsea Price $18.42 engineering & construction - a niche industry Shares 350.8 1 with a sustainable competitive advantage. Market Cap $6,462 1 Long-Term Debt 636 • It is the only pure-play among the 3 dominant competitors in an industry with the dynamics to Minority Interest 47 create a runway for significant growth. Cash 650 Enterprise Value $6,495 • Subsea 7 maintains a solid balance sheet and leadership interests are aligned with Valuation Summary shareholders. 2013 2014E 2015E FY 12/31 • The company has a record backlog indicating the Revenue 6,297 6,860 7,159 potential for strong growth, yet still trades at a ev/revenue 1.0x 0.9x 0.9x modest multiple of earnings. EBITDA 981 1,404 1,538 ev/ebitda 6.6x 4.6x 4.2x 3 Year Price Chart EPS $0.93 $1.89 $2.03 p/e 19.7x 9.7x 9.2x Trading Summary 52 Week High / Low: $22.61 / $16.70 Avg Daily Volume: 1.4 million shares Listing Exchange: Oslo Bourse 1 Adjusted for convertibles – see slide 30 12 Source: Capital IQ
Business Description • Seabed-to-surface engineering, construction and services contractor to the global offshore energy industry • Capable of executing projects of all sizes and complexity in all water depths 13
Investment Thesis / Variant Perception Global leader in oligopolistic industry dominated by 3 competitors Near-term industry-wide concerns and company-specific issues have caused the market to view the business solely through disappointing past earnings and depressed margins Normalized growth / margins for the industry and the company are being ignored Long-term, there are dynamics in place to allow for a long runway of revenue growth in an industry protected by sustainable barriers to entry Backlog growth is just the tip of the iceberg, indicating the potential for significant revenue growth and increased returns on capital Low margin contracts signed during the 2009-2011 period are being replaced with higher margin contracts High insider ownership aligns the interest of management and shareholders – capital investment and reinvestment opportunities are focused on returns We believe that shares trade at > 50% discount to the company’s intrinsic value 14
Industry Map Oil Service Majors Reservoir Data Baker Hughes, CGG Veritas, TGS Halliburton, Nopec, Polarcus Schlumberger Contract Drilling Atwood, Diamond Logistical Support Offshore, Ocean Rig, Major IOCs & NOCs Bristow, Era, Tidewater Rowan, Seadrill, Anadarko PEMEX Transocean BP Petrobras Chevron Repsol CNOOC Shell ENI Statoil Deepwater & UDW Service Equipment ExxonMobil Total E&C Manufacturing Saipem, Subsea 7, Cameron, Technip FMC, Aker Shallow & Deepwater E&C Other Equipment & Services Allseas, EMAS-AMC, Cal Dive Intl, Hornbeck Heerema, McDermott Offshore, Oceaneering 15
Industry Overview EIPC: Engineering, Procurement, Installation and Commissioning Sapura Crest merged with Kencana in April 2012 and is now known as SapuraKencana 16 Source: Subsea 7 September 2012 Company Presentation
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