BBI - Babcock & Brown Infrastructure

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?

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.

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.

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.

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

JTLP

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?

ROE said:

JTLP

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?

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Yeah i'd stay away from these stocks too. Dont get fooled by the high yields they are just to suck you in. Even in last years bull market they didnt do well. Now with the credit markets freezing up it only going to make it harder for these companies to expand. They structure these companies just like a house of cards. Anything happens they'll just end up like Centro. Again dont get sucked in by these high yields!!!!!

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.

JTLP said:

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

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Sure.

It's quite simple. Interest Rates, Macro Risk and Irrationality.

Short and basic version (finance 101):

Interest Rates
BBI and TCL (and a few others) are low risk, regulated, reliable steady dividend stream earners. They basically function like an Annuity (consider a Term Deposit if you like).

This strong correlation is perfectly illustrated by the downtrend in the last year that you pointed out. Over the same period, the RBA has been steadily increasing the cash rate.

What does this mean? this mean Investors expect more % return for their money. For example, you would therefore expect more % interest from your Term Deposit, and likewise for any other annuity or investment providing a steady income return on your capital.

Macro Risk
When there is increased macro risk, such as the global credit environment, investments when compared to Government Bonds (which are as safe as a guarantee that you will get) demand more return for the higher perceived or actual risk, otherwise you may as well just go and invest in Government Bonds - your moneys safe. So this 'risk premium' is what you expect and deserve for investing elsewhere. As everything is considered riskier than before when compared to Govt Bonds investors expect a higher % return. So these companies, BBI and TCL (and others) will experience one of two things:
1. Pay more dividends so the % return is equal to the risk premium expected for such stocks.
2. The share price reduces until the % return is equal to the risk premium expected for such stocks.

Irrationality
So if you have read this far you will understand that BBI and TCL (and others) needed to be slightly rerated for the above two reasons, and rightly so.
Kick in some fear and panic and they will be excessively re-rated giving them an unrealistic and undeserved risk premium and a higher than deserved yield. This happens when the perceived risk is higher than the actual risk, or generall sharemarket panic occurs, or other factors such as a general sharemarket downturn forcing margin calls.

All this is good if you want a bargain! (in the sense of it provides and excellent return for the actual risk which is lower than what is currently being reflected in current yields).

JTLP said:

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.

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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 said:

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.

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Do you know what 'debt to equity' means Nicks? Just a 2 minute glance at the balance sheet shows; Long term debt of $6.8 billion, Net Assets or Shareholders Equity $3.1 billion. You've got more than twice as much debt as equity. In laymans terms that's called 'geared to the teeth'.

Not to mention current assets don't even cover current liabilites so working capital is not exactly sound either. The leverage your way to prosperity binge is over, these type of companies are in for rough times.

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?

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 said:

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?

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Wasn't meant to be an insult, it was a genuine question. Anyway you can see debt is more than double equity. Historically a debt to equity ratio of over 50% would be enough to raise an eyebrow from the conservative minded.

It's all relative, I'm sure in this low interest rate environment you can find companies that are more highly geared than BBI but by any historical measure a 200% gearing level is very high.

Just look at another simple ratio, interest cover which is EBIT/ interest paid. A minimum acceptable interest cover ratio would be about 3:1. BBI's? 0.9:1. EBIT doesn't even cover interest costs. This is very alarming and for the chief financial officer to pretend otherwise is disengenuous in a climate of climbign interest costs.

Nicks said:

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!

Click to expand...

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

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 said:

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?

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Return on Equity and Return on Capital of less than 5% = woeful. This year has a forecast profit decline, highly geared with inadequate interest cover, I wouldnt even consider this investment grade.

As you noted, the company has a $2.2 billion market cap and $3 billion in net assets. Thus the best option for maanagment would be to liquidate everything, pay off the debt and return the left over to sharholders. That's assuming of course that the company could realise the value of the assets as written down in the books.

dhukka said:

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

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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.

Nicks said:

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.

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The company is paying out more in distributions than it makes. That is unsustainable unless they fund those distributions through raising more capital or selling assets.

Since the company is paying out all profits and thus does not reinvest anything back in the business, the only way the company can grow is to leverage up, raise equity or sell assets.

Why do would want to invest in a company that is in such poor financial shape and which is reliant on ever more debt, equity or asset sales to fund returns to shareholders and for growth? It's a horribly floored business model for the current environment and the current environment is here to stay for some time.

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.