BBI - Babcock & Brown Infrastructure

[roland]

New thread, I believe. Have noticed BBI starting to get higher broker recommendations. Anyone have thoughts on BBI? They have been buying up port facilities all through Europe. Anyone want to have a go at picking the bottom?

[Julia]

Roland, BBI gets fairly consistent Buy recommendations from analysts.
It doesn't ever seem to mean much. I don't expect much growth from it and keep it in the p/f for its yield and general stability.

[roland]

The chart doesn't look so good. I was trading them in July, but took a big hit in August and dropped them for BBP, which has faired much better.

This an excert from the Aegis review:
We continue to expect BBI to pursue and to deliver further growth, both organically and through future yield-accretive acquisitions. Walking away from its joint offer with APA for GAS is a clear signal of BBI's financial discipline in not overpaying for assets. We expect BBI to comfortably achieve its distribution growth of 7% for FY08 and FY09 and, importantly, fuel its distributions out of operating cash flows.

My feeling is that they may have some issues with Dalrymple and the poor performance of our coal handling facilities. I do think that their European growth is being somewhat over-looked.

[Nicks]

I hold TCL and believe a stock like this is essential stabiliser in your portfolio. For the reasons already mentioned, it is a solid cash earner - people will always drive. It shouldn't be too affected by the credit markets as they easily get finance due to the fact that they have very low risk steady income.
Excellent stock to be in at the moment and at this price its very attractive and brings a very nice yield alone (plus scope for capital growth up to and above $8 not only because it has in the past but for these same very fundamental reasons).
BBI is another that I categoirise in this basket with more or less the same explanation at the moment..... though slightly more complex it is returning a very nice yield.
Plus, both have potential for 30-40% even 50% capital gains potential to previous prices if the market goes up.
These 2 for a balanced, steady and yield earning portfolio are a good position to hold imo.

[JTC]

Nicks, would you be able to inform me as to why both TCL and BBI have both been in a downtrend forr the past year? Any reasoning behind why such low risk companies would be so down? Thanks

[ROE]

JTC

I dont know much about TCL but I know much about Babcock & MacBank model on these funds and I stay away as far as I can

The ways MacBank and Babcock make money is spin off funds they buy at a premium much like Centro and offload the debt to the fund and package it all up and sell to investors as it's a nice package.. no worry, high dividend yield sort of stocks. But the price for this pretty package is in the fine details
of incredible fees and performance bonus these funds then pay back to B&B and MacBank, which in turn leave very little left for investors who bought into it.

It works well in Bull market and cheap credit environment when everything go up. Bull Market ends sometimes last year and Credit start to get real expensive. You can work out where is the next stop for these stocks and the people associated with it

I can understand why most analyst is not very critical of these big company as they may end up paying them their salary :-)
but ask the tough question yourself... much like an Analyst who Ask Enron how do they actually make so much money and the CEO called this analyst an A**hole and ignore the question all together and later try to make a few phone call and try to get her sack. (The smartest man in the room doco)

I'm not saying these company going bankrupt but you got to ask the hard questions of how they making their money. What is left for investors?

[kengaikl]

Quote: Originally Posted by ROE JTC I dont know much about TCL but I know much about Babcock & MacBank model on these funds and I stay away as far as I can The ways MacBank and Babcock make money is spin off funds they buy at a premium much like Centro and offload the debt to the fund and package it all up and sell to investors as it's a nice package.. no worry, high dividend yield sort of stocks. But the price for this pretty package is in the fine details of incredible fees and performance bonus these funds then pay back to B&B and MacBank, which in turn leave very little left for investors who bought into it. It works well in Bull market and cheap credit environment when everything go up. Bull Market ends sometimes last year and Credit start to get real expensive. You can work out where is the next stop for these stocks and the people associated with it I can understand why most analyst is not very critical of these big company as they may end up paying them their salary :-) but ask the tough question yourself... much like an Analyst who Ask Enron how do they actually make so much money and the CEO called this analyst an A**hole and ignore the question all together and later try to make a few phone call and try to get her sack. (The smartest man in the room doco) I'm not saying these company going bankrupt but you got to ask the hard questions of how they making their money. What is left for investors?

[JTC]

LOL im not getting sucked in.
After a tiny bit more research and a debt to equity ratio of 202%

I think ill steer clear...ROE you summed it up nicely.

[Nicks]

Quote: Originally Posted by JTC Nicks, would you be able to inform me as to why both TCL and BBI have both been in a downtrend forr the past year? Any reasoning behind why such low risk companies would be so down? Thanks

[Nicks]

Quote: Originally Posted by JTC LOL im not getting sucked in. After a tiny bit more research and a debt to equity ratio of 202% I think ill steer clear...ROE you summed it up nicely.

[dhukka]

Quote: Originally Posted by Nicks Can you provide evidence of this research? Doesn't seem accurate, see below. It's more like 63% (see below). This is an appropriate level of debt and shows they are making use of it for EPS accredative projects and deals. BBI SP could drop as far as it likes, it's cash flows are what counts - and these are steady, reliable and regulated. Provides a good time for those whom are calm to pick up this stock at a bargain price with a ridiculously good yield (imo) and a capital appreciation that more adequately reflects the yield when all the panickers have calmed down. IMO those that are getting 'sucked in' are those that are panicking at the moment with rational shares and missing out. Taken from today's news: ........BBI's chief financial officer, Jonathon Sellar, expressed puzzlement at the market's punishment of his company's share price. Mr Sellar dismissed the debt concerns surrounding BBI, stressing its $9.5 billion of debt compared with its $15 billion of assets. Mr Sellar said BBI also have no debts that were leveraged to its market capitalisation, like the flailing financial group Allco Finance. The company's debt convenants are linked to its cash flows. Mr Sellar said BBI's heavy exposure to non-cyclical "regulated businesses" - particularly in the energy sector - meant the group's cash flows were secure. "The rising cost of debt can be passed on," he told the Herald, noting BBI's ability to pass on higher interest costs to the customers of its assets.

[Nicks]

LOL no need for the insult Dhukka. Yes I realised that (basic) mistake, you just bet me to the edit while I was looking at the actual financial statement (which I hadn't done yet).

The point remains though why do you consider 2:1 geared to the teeth?

Anyway - the main point I was trying to make is that they can cover rising cost of debt quite easily as they are a regulated infrastructure, and no debt is leveraged to its market cap.



Thoughts?

[Nicks]

ok so BBI has Current Assets vs Current Liabilities 1 to 1.4.

So what do they do to make up the shortfall? clearly the market has hit them for this.

Also, I think the market has overpriced the gearing aspect. I guess eveyone thinks (like Dhukka) that BBI is overgeared and they have reinforced this with their info about offloading a minority of assets.

What I think though, is that with a market cap of 2.4 billion and a reliable income stream is it looks like good value with net assets of 3 billion. Especially since it has little problems with repaying and securing debt!

[dhukka]

Quote: Originally Posted by Nicks LOL no need for the insult Dhukka. Yes I realised that (basic) mistake, you just bet me to the edit while I was looking at the actual financial statement (which I hadn't done yet). The point remains though why do you consider 2:1 geared to the teeth? Anyway - the main point I was trying to make is that they can cover rising cost of debt quite easily as they are a regulated infrastructure, and no debt is leveraged to its market cap. Thoughts?

[dhukka]

Quote: Originally Posted by Nicks ok so BBI has Current Assets vs Current Liabilities 1 to 1.4. So what do they do to make up the shortfall? clearly the market has hit them for this. Also, I think the market has overpriced the gearing aspect. I guess eveyone thinks (like Dhukka) that BBI is overgeared and they have reinforced this with their info about offloading a minority of assets. What I think though, is that with a market cap of 2.4 billion and a reliable income stream is it looks like good value with net assets of 3 billion. Especially since it has little problems with repaying and securing debt!

[Nicks]

Thanks for the comments as it has got me thinking more laterally. Im keen for some good discussion on this as I hold a few but think its a good opportunity to load up at a discount.

So my question is this..... so BBI has got themself into a bit of a short term financial mismanagement. We assume this can and will be corrected (seems like so despite what they say they are taking such actions to correct). Then is the significance of the fall in the SP justified? this is the 64 mil question!

Market Cap of 2.4B vs Net Assets of 3B. While their gearing is 2:1 (and this is not unrealistic for this type of business?) their working capital is not great (1<1.4) but could perhaps be attributable to all the issues going on at present. So is it a combination of some fundamentals causing a justified correction which have fuelled panic and fear in this market for an over correction? over correction = good buy?

Assuming they can manage their assets and business - and BBI are touted to be among the best, then the current discount relative to the net assets represent a buy opporunity imo?

Thoughts?

[dhukka]

Quote: Originally Posted by Nicks Thanks for the comments as it has got me thinking more laterally. Im keen for some good discussion on this as I hold a few but think its a good opportunity to load up at a discount. So my question is this..... so BBI has got themself into a bit of a short term financial mismanagement. We assume this can and will be corrected (seems like so despite what they say they are taking such actions to correct). Then is the significance of the fall in the SP justified? this is the 64 mil question! Market Cap of 2.4B vs Net Assets of 3B. While their gearing is 2:1 (and this is not unrealistic for this type of business?) their working capital is not great (1<1.4) but could perhaps be attributable to all the issues going on at present. So is it a combination of some fundamentals causing a justified correction which have fuelled panic and fear in this market for an over correction? over correction = good buy? Assuming they can manage their assets and business - and BBI are touted to be among the best, then the current discount relative to the net assets represent a buy opporunity imo? Thoughts?

[Nicks]

Quote: Originally Posted by dhukka There's only two things they really can do, sell assets or raise additional capital to retire some of their debt.

[dhukka]

Quote: Originally Posted by Nicks Yes but what about the third option of generating net positive income over the next 12 months to cover it? Financials are historical so it's not going to show us this whereas their forecasts can. They are paying their dividend out of cash after debt servicing and working capital - note page 9 of Analyst presentation: Distributions paid substantially from operating cash flows after: debt servicing working capital maintenance capital expenditure cash tax paid It does NOT include proceeds from regearing, refinancing or restructuring initiatives So - they are implying that working capital is taken care of. Is it just that at the date of the financial reports that some income could not have been accounted for? (ie it hadn't met the revenue recognition standards at that time) otherwise how can they make such a statement in their Analyst Presentation, as the financials don't agree with this.

[LifeOfRiley]

I just bought a bunch of these securities, hard to see anything but a total bargain at the current prices, with distribution guidance at 15 cents per security (tax deferred).

I have to disagree with Nicks, I don't see any short term financial mismanagement. Their reports and distribution guidance are consistent and the company line has barely changed. Their debt/equity ratio is 70:30 and that what the regulators allow for I'm sure.

And dhukka, if you check the news on their website bbinfrastructure.com, it looks like at Dalrymple Bay they just completed Phase 1 of their 7X expansion with $1.3 billion invested there. When the Phase 2/3 is completed they will have full coverage of their distribution from operating cashflow.

I'm not claiming I understand their business model completely but it is not a traditional company with everything hingeing on profit & loss. Would be good to find a guide comparing traditional P&L business with an infrastructure fund. Sure, returns will never be spectacular but you will always get one I reckon.