BBI - Babcock & Brown Infrastructure

[banska bystrica]

I look at the Top 20 list of BEPPA every fortnight starting Jan 1. It is not available free of charge but you can get a copy sent by the BBI share registry (Link Market Services) for a small cost.

 

[select]

BB,

FCF = net earnings + depreciation - maintenance capex.

Just ask Warren Buffet if you don't believe it.

I hope you have learnt something.

 

[banska bystrica]

BB,

FCF = net earnings + depreciation - maintenance capex.

I posted this: "FCF = Net Income plus amortisation/depreciation minus capital expenditure."

So what's your point select? It appears as though my formula is identical to yours.

 

[select]

BB,

That's where I am confused. More simply, FCF is Operating Cash Flow - Capital Expenditure - Acquisitions.

It's great that you can quote what the FCF equation is but it doesn't appear that you are using it. You have been stating that BBI has a FCF of approx $280 million pa and I was wondering how you arrived at this figure. It looks to me that you have used the 6 month Operating Cash Flow of $140 million and multiplied it by 2. But this isn't correct is it?

Thanks.

 

[alphaman]

you can get a copy sent by the BBI share registry (Link Market Services) for a small cost.

That's interesting, I didn't realise such services are available. Thanks for the tip, might come in handy one day.

 

[alphaman]

That's where I am confused. More simply, FCF is Operating Cash Flow - Capital Expenditure - Acquisitions.

That's the most common definition of FCF, but accounting standards do not actually define FCF (it's not on the cash flow statement), so BBI has been using an earnings based definition, which makes its referral of free "cash flows" a bit of a misnomer.

Using the cash flow definition of FCF, normally you want to see very positive operating cash flows, so that after investing cash flows (usually negative because the firm wants to spend on capex), the firm still has cash left to pay creditors and shareholders. In BBI's case, it is relying on asset sales to generate FCF. Obviously that's not how a business is normally run, but banks are calling the shots now.

 

[select]

Alphaman,

Yes FCF is rarely reported but I would really like BB to tell us what BBI's free cash flow was in the 6 months to Dec 31.

It's clear that it wasn't $140 million as he has claimed.

Is it closer to $6 million?

BBI is 4c for a reason.

 

[banska bystrica]

Alphaman,

Yes FCF is rarely reported but I would really like BB to tell us what BBI's free cash flow was in the 6 months to Dec 31.

It's clear that it wasn't $140 million as he has claimed.

Is it closer to $6 million?

BBI is 4c for a reason.

Firstly, when did I say the FCF was $140M? Was that statement made prior to or after the half yearly results were announced?

Secondly, BBI is 4c because the market is shyte scared about any stock with lots of debt. 4c is a result of instos bailing out big time. See latest Deutche Bank announcement. Big instos do not care about fundamentals or price. When they decide to exit, they just exit. If you honestly think 4c is a fair value price, then that's your call. I am long the stock because I think 4c is an oversold undervalued price. Therefore, it's horses for courses.
In November, I loaded up at 3c and below. The stock rallied 400% within 6 weeks. Please tell when the "market" was efficient. At 3c in November, or 14c in January? The market is all over the place, hence the opportunity for those who recognize value.

 

[random]

Yes BBI has substantial debt.
Yes BBI has to sell assets and yes the banks have put a "top up" on the interest rate for the corporate debt.
None of this is groundbreaking news!

Management of BBI are well aware of this and are conducting their own show with no misaprehension about their true position.
I say this because some keep saying that the shots are being called by the banks..... well i disagree, shots are not being called by the banks. Why exagerate the situation and make it into something it is not. The current management would be doing exactly what they are doing now if the banks wern't being banks.

Why is it 4c?
A large part is because Deutch have their own problems and they are not insignificant problems.
The want out and they want to mop up. They want out now. The decision has been made. The fact that they lose is of little concern to them. They want to rid themselves of as many bad investments as possible at this time to have a clean set of books.
Small investors get rattled and bail out taking it further down the slippery slope. A real shame.

When Deutch have finished it will be interesting to see what the administrators of BNB do with their shareholding in BBI.
Will they hold or will they sell?
Yes, could be more negative vibes.

None of this does the sp any good right now sure, its just part of the process we have to go through.
Most on this forum have no expectation of an early windfall but are looking down the road.

Cheers

 

[select]

You have been claiming BBI has FCF of $280 million (you have obviously taken the HY $140 million and multiplied it by 2 to create a FY figure) and this claim has persisted post the half year accounts being released.

It looks like you made a simple but tragic mistake with your research and you understood Operating Cash Flow to be Free Cash Flow.

How much longer will the creditors allow BBI to continue to fund their capex requirements with debt when the FCF is so very poor?

 

[banska bystrica]

You have been claiming BBI has FCF of $280 million (you have obviously taken the HY $140 million and multiplied it by 2 to create a FY figure) and this claim has persisted post the half year accounts being released.

Please direct me to the posts since the first half result where I have claimed BBI has FCF of $280 million.

 

[banska bystrica]

You have been claiming BBI has FCF of $280 million (you have obviously taken the HY $140 million and multiplied it by 2 to create a FY figure) and this claim has persisted post the half year accounts being released.

I have just looked back through every post I have made since the first half result and NOT ONCE have I "been claiming BBI has FCF of $280 million".

You stated that this claim "has persisted post the half year accounts being released". That is a complete fabrication. Please apologize immediately and state your real intentions on this forum.

 

[skc]

I have just looked back through every post I have made since the first half result and NOT ONCE have I "been claiming BBI has FCF of $280 million".

You stated that this claim "has persisted post the half year accounts being released". That is a complete fabrication. Please apologize immediately and state your real intentions on this forum.

BBI make plenty. They make about 10c per share FCF annually. Obviously there will no dividend for the next year because they are paying down debt.

FWIW, this is the only mention (4 Mar) I can find regarding FCF by BB since the interim result. Based on 10c per share, and total share of ~2376m, that's ~$237.6m.

Not really taking any sides here - you guys go ahead and duel it out. I enjoy the debate here and one can learn a lot about how to analyse a company's fundamental.

BB, out of interest, do you build your own model on BBI's financials? If so, what do you use for discount rate?

 

[alphaman]

The stock rallied 400% within 6 weeks. Please tell when the "market" was efficient.

3c to 14c is exciting percentage change for traders, but fundamentally given the size of BBI's debt relative to market cap, the change in BBI's toal enterprise value is actually almost negligible. So I would not really use that to disprove market efficiency.

Even a more substantial change would not necessarily disprove market efficiencty, which is based on "currently available information". If Kevin Rudd announces tomorrow that he will give BBI $3 billion for free, and BBI jumps, does that mean people were wrong to be cautious about BBI today? No, it just means the shareholders are lucky, but no one would have reasonably priced in Rudd's gift.

By the way I'm not saying market is always right, just saying price changes alone do not disprove market efficiency.

 

[TheAbyss]

The below actually states FCF of $300m or 2376m shares at 12.5c $297m.

Either way BBI may come out on trumps. Their chances are a lot greater than BNB that is for certain.

There are really two methods to assign fair value to a utility stock like BBI. I have looked at “NAV” using Sum of Parts valuation and FCF (free cash flow) and either method confirms BBI is seriously undervalued.

Net Asset Valuation (NAV) is approximately $1.30 based on an average EBITDA multiple for their assets of 11. This is supported by recent asset sales, namely Powerco and Euroports.

The net asset value as per BBI’s balance sheet takes into account depreciated historical cost of assets built or historical prices paid upon acquisition of assets. This valuation “may” be inaccurate because of the current market conditions with credit still pretty well frozen. Credit in Europe is still frozen. Banks are hoarding cash and not lending. The consumers are also not wanting to borrow. The situation is bleak. If this continues into 2010/11, BBI “could” be in trouble when it comes to refinancing at the asset level even though their free cash flow covers interest comfortably. If BBI have trouble refinancing in 2010/11 with their quality infrastructure assets, then indeed the world will be in an ugly state.
Moody’s has reduced its credit rating on BBI’s corporate debt to B2, five notches below investment grade. Such a low credit rating makes it difficult to refinance debt via the capital markets (as it shrinks the pool of potential lenders) and also increases the cost of debt markedly. It also raises a potential issue of reducing the credit ratings at the asset level. I expect operating cash flow priority will be given to debt repayment over repayment of the hybrids in order to restore the credit rating. Therefore, any dividend will be welcome in the next two years but not expected. A small dividend in 2010/11 is not out of the question if corporate debt is paid down to minimal levels. Let’s see the interim results on Feb 25 first. Then we will know more.

I continue to believe that the BEPPA at a price close to parity with BBI is a value entry point into BBI if you desire exposure to the BBI story. BBI at less than 4c was a steal, however, BEPPA sit senior to ordinary BBI units in a wind-up scenario (not for one moment do I think that is happening but you never know what the financial world will be like in 12 months time) and in dividend payment priority. Its dividend yield is very high at current market prices around 13c in the dollar, paying BBSW +115 basis points on a face value of $1 and although the dividends are currently not being paid they are not lost but are instead deferred and COMPOUNDED, and the BEPPA price should converge on the payout value ($1.04+) as 2012 approaches on the assumption that BBI remains financially viable. BEPPA really seem tremendous value at such a small premium to BBI. Buy them and treat them like gold.

Moving onto the SPARCS.

Pg 19 of the October investor pack shows the SPARCS liability. The full value is NZ$115.952M, and the notes to the balance sheet shows that half of this is considered a current liability consistent with the conversion timing.

It is a tough call on how BBI will handle the SPARCS maturing but they do have options. The options available to BBI are as follows:

1. Refinance with senior debt (as did DUET, ASX code: DUE), although this would be difficult / expensive / unlikely given the current credit rating,
2. Encourage SPARCS holders to remain with better terms (ie. far higher margin) on SPARCS,
3. Use operating cash flow or asset sale proceeds to meet redemption or
4. Convert into BBI units

Clearly, the last option would not be palatable to BBI security holders because of the dilutionary impact on BBI. I cannot see Directors choosing this option. I see Option 3 as most likely.

Regarding asset sales, the company are doing exactly what they said they would at the AGM. They have made part sales of assets (Powerco and Euroports), both above book value. A sale of 100% of DBCT at an EBITDA multiple of 11 or above would give them enough surplus cash to extinguish corporate debt and also provide cash to deal with SPARCS. See Page 16 of the October Investor Pack. There are ZERO corporate debt commitments beyond 2012/13.

On to free cash flow which is probably a more accurate reflection of BBI’s position rather than NAV since the market remains unconvinced that BBI’s assets have not been impaired. I disagree with the market but I have to accept the market’s current reluctance to value BBI at what I do. They are the facts. The market will not value BBI according to NAV. I’d be happy with 50% of NAV within 12 months. I'd sell a few then.
From the Investor Pack and taking into account the sale of Powerco and Euroports, I have ascertained that the following free cash flows per annum apply:

Powerco $10M
IEG: $33M
CSC: $3M
NGPL: $50M
AETD: $36M
DBCT: $115M
PD Ports: $45M
Euroports: $27M
Westnet Rail: $41M
Cap ex maintenance: -$60M

Total free cash flows of 300M. Therefore free cash flow per BBI security equals 12.5c. A conservative cash flow multiple of 6 gives a valuation for BBI stapled securities of 75c.

The average of 6 was taken using the following utility companies trading on the ASX:
SPN, DUE, SKI, APA, CIF, ENV and VIR.

BBI is currently trading on a P/FCF ratio of 1 which in comparison to other utilities, is a discount of 84%. Do the risks with BBI warrant an 84% discount?

NAV values BBI at $1.30
FCF values BBI at 75c.
Market values BBI at 12c.

Who is right? Time will tell but I’ll stick with somewhere between the factual fundamentals analysis of NAV ($1.30) and FCF (75c) rather than an inefficient, terrified, panic driven market price of 12c. The market was very wrong at 2.5c (thankyou market..) and it is still very wrong at 12c, in my opinion.

 

[banska bystrica]

The BBI half yearly was released late Feb. On what date did I make that post you refer to?
"select" has told an outright porky pie and hasn't got the guts to even apologize.

 

[select]

I have just looked back through every post I have made since the first half result and NOT ONCE have I "been claiming BBI has FCF of $280 million".

You stated that this claim "has persisted post the half year accounts being released". That is a complete fabrication. Please apologize immediately and state your real intentions on this forum.

"Charts don't lie" someone said. Sure, every chart is perfect in hindsight. What did Burns Philps chart say at 1c? Sell? What did the SCS chart say when AMP sold out at 7c after buying at 50c? Sell? Well that stock hit $1+ years later.
I am not interested in what a chart says or what an analyst from a poor outfit like ML says. I am not interested in what the stock price is doing today or next week or next month. I am sure I have done hundreds of hours more homework than all those analysts combined. Doesn't mean I'm right but doesn't mean they are right either.

Talk of BBI going bust is fanciful. Where's the evidence?
NO asset impairment.
NO breach of any debt covenants.
EBITDA up 5% in a savage bear market.
On a look through basis, they are still generating about $200M free cash flow per year. Even without an asset sale, they can pay back half their corporate debt by 2011/12. What's all the panic about?
I'll tell you the big difference between BBI and CNP, BNB, AFG, OZL etc.
1. NO asset impairments because of the quality of assets withstanding this deep global recession and
2. The underlying business is cash flow positive.

No bank will not refinance in 2011 under those scenarios.
The only thing that can stuff BBI is if this global recession turns into the mother of all depressions and if that happens, not even CBA will be worth a cracker.

This could drag on forever. I am simply wanting to know how you arrive at all the different FCF's that you post.

One post made prior to the half year result says $300 million, another post made after the half year result says 10c per share ($240 million), another says $200 million.

What was BBI's FCF in the first half to Decembr? Was it approx $6 million?

Why is BBI debt funding their capex requirements if their FCF is as good as you suggest it is?

Thanks

 

[banska bystrica]

Please direct me to the posts since the first half result where I have claimed BBI has FCF of $280 million.

 

[random]

Banska,
Do you mind listing here the top 4 shareholders and % owned of BBI and BEPPA as per your latest "link market services" report?

 

[banska bystrica]

Banska,
Do you mind listing here the top 4 shareholders and % owned of BBI and BEPPA as per your latest "link market services" report?

random,
I would normally have no problem doing that BUT...... think about it. I pay for the listing from Link and if I posted it on here for free, people like "select" get to see that info for nix. Some here have attacked me with porky pies and I honestly do not feel inclined to "share" something I have paid for with those people.