RBC raises price target on Fairfax Financial

RBC Dominion Securities analyst Bart Dziarski raised his target on Fairfax Financial Holdings (Fairfax Financial Holdings Stock Quote, Chart, News, Analysts, Financials TSX:FFH) to US$2,318.00 from US$2,223.00, citing the potential earnings contribution from its proposed US$5.6-billion acquisition of a controlling stake in India’s IDBI Bank.

As reported by the Globe and Mail, Dziarski maintained his “Outperform” rating and named Fairfax his top value pick. The average target is US$2,029.36.

Dziarski said the acquisition of a 60.72% stake in IDBI Bank could generate an internal rate of return of approximately 13%, with potential upside into the high teens.

“The $5.6-billion IDBI deal provides FFH with access to India’s fast-growing economy via the nation’s 6th largest private bank,” Dziarski said in his Oct. 26 report.

Fairfax was selected Oct. 14 as the preferred buyer of the stake from the Government of India and Life Insurance Corp. of India, offering 81 rupees per share. The proposed acquisition remains subject to definitive agreements and regulatory approvals. Fairfax plans to combine its interests in Go Digit General Insurance and Go Digit Life Insurance, collectively known as Digit, and IIFL Capital Services with IDBI Bank. The combination would create an Indian financial services company spanning banking, insurance, investment banking and wealth management.

“While we acknowledge there are many moving pieces to the deal, we have included IDBI in our model assuming Q1/27 close and estimate 7% EPS accretion in 2027,” Dziarski said.

He estimates Fairfax is paying approximately 1.2 times IDBI’s book value. “We model an attractive 13% IRR over a 15-year holding period, assuming IDBI sustains its 14% ROE, which ranks second highest among Indian bank peers, and slightly below IDBI’s 15% target,” he said.

Dziarski sees potential for returns in the high teens if IDBI’s valuation increases or the bank deploys excess capital. He noted that IDBI has a common equity Tier 1 capital ratio of 27%, compared with an 18% peer average.

However, Dziarski identified several factors that could offset some of the transaction’s benefits.

“Our overall favourable view of the transaction includes partial offsets,” he said. Dziarski expects Fairfax to slow share repurchases as it allocates capital toward the acquisition, reducing his quarterly buyback estimates for 2027 and 2028 to 50,000 shares from 100,000. He also expects the contribution from associates and non-insurance businesses to increase to approximately 30% of earnings from 25%.

Although he does not view the change as concerning, Dziarski said the acquisition adds complexity to Fairfax’s operations, which he believes will continue to limit the company’s valuation relative to property and casualty insurance peers.

The analyst’s revised target is based on 1.4 times estimated third-quarter 2027 book value per share, below the 1.7 times multiple implied by his analysis of P&C peers. Despite Fairfax shares gaining approximately 15% in October, Dziarski said the stock remains attractively valued.

“Despite the recent move higher in the shares, with FFH up 15% in October, FFH continues to trade at an attractive forward 1.1-times P/B multiple and we maintain FFH as our top value pick,” he said

Dziarski increased his 2027 and 2028 earnings estimates to reflect the anticipated contribution from IDBI, assuming the transaction closes in the first quarter of 2027.

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