BBI - Babcock & Brown Infrastructure

[fuzzie]

BBP market value: $60M
BBI market value: $175M

Market rates BBI a 3 times more valuable company than BBP at current prices.

Well yes, if you look at it that way. But the NTA per share is about the same going on the published figures, however the Aegis research seems to raise questions over that NTA valuation and there is the problem that they don't seem to be covering interest with earnings.

I think the numbers for BBI look better, therefore I'd expect to see the BBI sp at least a little better than BBP. As for BEPPA........

 

[banska bystrica]

Well yes, if you look at it that way. But the NTA per share is about the same going on the published figures, however the Aegis research seems to raise questions over that NTA valuation and there is the problem that they don't seem to be covering interest with earnings.

I think the numbers for BBI look better, therefore I'd expect to see the BBI sp at least a little better than BBP. As for BEPPA........

Yes I agree. As for BEPPA?.... Well BEPPA is a strange animal. As a debt security with face value $1, it shouldn't really have much correlation to the BBI price but if you look at the graph, it has. What has happened is the market has basically written off BBI and therefore dumped both BBI/BEPPA to distressed levels. BEPPA being illiquid has just tracked BBI on the downward path. It's a hard one to value (BEPPA) because in reality it's probably worth either ZERO or $1.04.

 

[random]

In August /Sept of 2008 Babcock and Brown Group had about 8% of the shares in BBI.
I was wondering if anyone knows if they have sold these off and if so what % they still have left?

(I know shareholdings are normally not relevent prawn 86 but in this case i think it is relevent to know).

 

[suhm]

You have offered about as much rationale as the local press covering BBI who have no idea what they are talking about when it comes to matters involving BBI. One poor journo even mention Babcock and Brown (BNB) having to sell DBCT. My goodness, how can BNB sell DBCT when they don't even own it?

Forget about your general "rationale" drsmith and give me some numbers that show BEPPA being worthless.
Rationale is another way of saying "I have no idea why I think this way but I am going to say it anyway".
Solid numbers drsmith, nothing less, or you will be ignored and your posts will not be responded to in future as far as I am concerned. Happy to hear the bearish view but give me some evidence. Where are the breach of debt covenants? Where are the asset write-offs? Show me how they lose $4Bn worth of equity to make BEPPA worthless?

I've been doing some back of the envelope calculations and was wondering how you got the figure of $4 billion?

From their interim results, using the one from their investor pack as it doesn't have the assests up for sale listed as current.

Net assests = 2.36 bn
- 1.5bn goodwill
= 0.8bn

Not sure if BEPPA and SPARCS are listed as interest bearing liabilities on the balance sheet but if so +1bn = 1.8bn

I understand most of the debt is non-recourse to BBI, but if the assests do become insolvent then the net assets associated with them would also be lost.

Or is it from the proportionally consolidated assets? net assets 17.4bn and net debt 11.3bn (including BEPPA and SPARCS).

Why are these numbers different to consolidated balance sheet ones?

Its not the easiest annual report to read.

Edit. There's also the 4.1bn of other intangibles which if discounted would wipe out the security for BEPPA

 

[ricee007]

I'm scared BEPPA may drop....
Why do I hold?

If BEPPA drops below 10c due to Euroports (or similar)... I STILL think it is very unlikely that there won't be a time within 3 years that BEPPA WON'T be above 10c.

As such, I think this is another reason why I consider BEPPA *fairly* long-term safe.

EVEN IF
PD Ports sold for 300MGBP.
We had bad Euroports news
DBCT sold 49% at <$1.1Bn

All happened.... I believe that BBI would still be in the position to offer some sort of BEPPA restructure within 3 years... whether that be as little as just the interest payments of about 20c in three years ($155.6M spare cash over three years isn't hard to imagine)... or just BBI hitting $0.25 and being offered 2 BBI shares (and selling for somewhere south of $0.50c... but ).

Long story short... even if BEPPA drops.. I find it hard to believe that BEPPA won't rise to be above 10c within 3 years.... As such, I see it as not PARTIUCLARLY high risk.

(I still think it's most likely that I will get at least $1 back, but.)

 

[hardyakka]

I've been doing some back of the envelope calculations and was wondering how you got the figure of $4 billion?

Two points:
a) If you are interested then if you read through some previous posts of mine in the last few months you will see a detailed analysis of NTA at $3.5B after a general impairment charge (being a "just in case" provision) of $0.5B.

b) Intangibles do not mean things such as mastheads and goodwill only, it includes DBCT which is a lease.

thought for the day-"If the right fluffy stuff is selected than the death spiral impact will be all soft and flaccid"

Think about it

 

[banska bystrica]

suh m,

The balance sheet as at Dec 31 listed Net assets at $2.364Bn.
This includes all hybrid debt (SPARCS and BEPPA).
This total seets figure includes all the BOOK values of assets. DBCT has a book value of $1.9Bn. The general consensus is that it will attract a sale price of at least $2.7BN. Even bearish analysts at Wilson HTM are assigning an EV of $2.6Bn for DBCT.
So, we can add in another $800M to the Net Assets figure which is value not reflected in the books.
That bumps the Net Assets figure to $3.164Bn. Since BEPPA is included in that figure, there needs to be total impairment in the remaining assets, excluding DBCT, of $3.964Bn ($3.164BN PLUS $800M)for BEPPA to receive nothing.

Now even if you write off all the $1.54Bn goodwill (and I do not see how one can) we still have Net Assets of $1.62Bn AFTER repayment of all bank debt and hybrids.

For a detailed understanding of Goodwill and Intangibles, please read pages 129-131 of the 2008 Annual Report.

Further, (see my previous posts) I have written off $1.5Bn in net assets in an "end of world GFC" scenario. This effectively renders BBI equity as worthless but BEPPA remains in tact at full face value of $1 per BEPPA.

 

[ricee007]

Two points:
a) If you are interested then if you read through some previous posts of mine in the last few months you will see a detailed analysis of NTA at $3.5B after a general impairment charge (being a "just in case" provision) of $0.5B.

b) Intangibles do not mean things such as mastheads and goodwill only, it includes DBCT which is a lease.

Again... NTA = net tangible assets.
I don't believe NTA could be $3.5Bn.

I do believe net assets could be $3.5Bn.

Kind Regards,
Rhys

 

[hardyakka]

Again... NTA = net tangible assets.
I don't believe NTA could be $3.5Bn.

I do believe net assets could be $3.5Bn.

Kind Regards,
Rhys

Fair cop, a slip of mine....Cheers

.........................................................100 characters

 

[persistentone]

Does this potential Chinese investment in rail infrastructure in Australia have any potential implications for Westnet Rail?

http://www.reuters.com/article/rbssSteel/idUSSYD43758820090724

 

[persistentone]

Can someone tell me what are the EBITDA multiples now on the books for BBI for the following key assets:

DBCT
Powerco
IEG
Cross Sound Cable
PD Ports
Westnet Rail
Alinta
NGPL
Euroports

I'm expanding on a stress test done by BB and I'll share the numbers from that when I am done. Since the bears here aren't apparently willing to do any research, I want to at least articulate clearly the EBITDA multiples at which BEPPA is likely to become worthless.

 

[persistentone]

Can someone breakdown what businesses BBI includes in its Australian ET&D numbers, and is the contribution of each of these businesses broken out separately anywhere?

I keep seeing this "Australian ET&D" referred to as "ex-Alinta". Alinta is an Australian natural gas retail supplier? Did they sell Alinta, and if not why it is referred to as ex-Alinta?

 

[persistentone]

I'm trying to get my arms around the Powerco sale. My numbers look suspect so I would appreciate some corrections.

BBI sold 58% to QIC for around $423M NZD (let's call it $350M AUD).

Did QIC assume 58% of all debt, both non recourse and corporate debt?

Assuming prorata assumption of debt, and using book value for the asset around $1.5B, I calculate the original net equity after all debt on the asset around $328M AUD, prior to sale. Is it right?

58% of $328M would have been $190M AUD, but we were paid $350M, which seems a considerable premium.

Which numbers above are wrong?

Note I am having to deduce most of this from tiny bits and pieces in different press releases. I don't have a consolidated view of the sale to read.

 

[persistentone]

Who publishes some 2009 EBITDA estimates for BBI? I'm trying to validate growth or shrinkage assumptions versus 2008 EBITDA.

 

[persistentone]

I'm trying to break out the 2008 EBITDA numbers for each key asset, and to my surprise the 2008 annual report does not have this in a tabular format. Instead they have detailed descriptions of each asset along with its EBITDA. The problem is that many of these contain only partial contributions. This probably means they bought the asset in 2008. So NGPL for example has a five month EBITDA of $72.8M AUD. I can I just extrapolate from those number to derive the equivalent 12 month EBITDA? For example: 12/5*$72.8M = $174.7M

 

[banska bystrica]

I'm trying to break out the 2008 EBITDA numbers for each key asset, and to my surprise the 2008 annual report does not have this in a tabular format. Instead they have detailed descriptions of each asset along with its EBITDA. The problem is that many of these contain only partial contributions. This probably means they bought the asset in 2008. So NGPL for example has a five month EBITDA of $72.8M AUD. I can I just extrapolate from those number to derive the equivalent 12 month EBITDA? For example: 12/5*$72.8M = $174.7M

The reported 2008 figures for NGPL included only 5 months of operations.
The Dec 31, 2008 figures represented a full 6 months operations and the EBITDA for the six months was AUD$133.6M (This was BBI's 26% share of EBITDA).
ABN Amro have a very good handle on BBI and they are forecasting EBITDA of AUD$256.4M for NGPL for the current financial year (2009/10) and $277.1M for 2010/11. This justifies an EV of $2.7Bn, possibly $3.3Bn if you use the growth figures of 2011.

 

[persistentone]

The reported 2008 figures for NGPL included only 5 months of operations.
The Dec 31, 2008 figures represented a full 6 months operations and the EBITDA for the six months was AUD$133.6M (This was BBI's 26% share of EBITDA).
ABN Amro have a very good handle on BBI and they are forecasting EBITDA of AUD$256.4M for NGPL for the current financial year (2009/10) and $277.1M for 2010/11. This justifies an EV of $2.7Bn, possibly $3.3Bn if you use the growth figures of 2011.

While I understand that EBITDA is the common valuation metric, I really wish they would break out free cash flows for each asset. Because ultimately its the free cash flow that is the money available to pay down debt.

I'll continue to model on EBITDA because that is what they give, and there are only so many hours in the day for me to reverse engineer the cash flows on my own using their capex numbers.

 

[banska bystrica]

NGPL: (6 months to Dec 31, 2008)

EBITDA: $133.6M
Net Financing costs - asset level ($50.4M)
Corporate debt int exp ($20.1M)
Maintenance Capex ($11.3M)
Tax Paid ($3.6M)
Other Payments $8.0M
FX gain on cash flow hedges $5.5M
***Other ($28.3M)
Operating cash flow: $33.4M

*** This represents adjustments made to reconcile the difference between BBI's proportionate share of Operating cash Flow (ie. EBITDA less financing costs, maintenance capex, tax paid etc) and the distributions received from BBI's investment in NGPL where it has a minority investment.

 

[persistentone]

After a first pass to expand on the stress test model BB worked on, I think I am prepared to try to articulate the assumptions under which BEPPA becomes worthless, and sees no recovery in administration. I'm not prepared to say I believe this case yet, but doing this work certainly heightened my awareness about how we get the valuation we have for BEPPA today.

First, let's talk about multiples in general, in a distressed situation. These three assets are cyclical assets, and as such their EBITDA is subject to severe diminishment in a cyclical downturn, and the EBITDA multiple used to value them is subject to contraction. Those three (with the EBITDAs I used) are:

Westnet Rail: $95M
PD Ports: $90M
Euroports: $87M

These EBITDAs assume appropriate diminishment of revenue in a downturn.

For multiples, a railroad, for example, in healthy times gets an EBITDA multiple from 6 to 12 based on my research (there is a tremendous variation because of large differences in quality of earnings from different railroads). In a cyclical downturn, these assets normally get multiples of 5 to 8. I did a quick test against the current market caps of some US railroads and was coming up with EBITDA multiples of 5 to 7.

For the bear case to be made for BBI, you assume that the three assets above will in a distress sale get offers around a 6 multiple of EBITDA. Based on debt in all of them that makes them failed assets (we have no net equity).

Next look at the natural gas plays. These are much higher quality assets and have much less cyclicality in them. I gave all of these an 8 multiple on EBITDA:

International Energy Group (IEG): $96M
Cross Sound Cable (CSC): $20M

Australian ET&D: $188M
(e.g., WA Gas formerly Alinta
Dampier to Bunburry (DBNGP)
Multinet
Tasmanian Gas Pipeline
Westnet Energy)

Natural Gas Pipeline Company of America NGPL: $240M

I gave Powerco a 7 multiple on $86M EBITDA, a little lower than the 2008 sale, which allows for the fact that a utility is much more subject to diminished EBITDA in a downturn.

Without doing the math here in detail, the above EBITDAs and multiples leave BBI and BEPPA in a world of hurt. It all comes down to DBCT. If you use a 2010 EBITDA of $224M and a multiple of 9 in a distress sale, you end up with SPARCs and BEPPA worthless.

I made the analysis more sophisticated by factoring out non recourse debt on assets that would sell below their net asset value. Unfortunately, $174M of PD Ports is corporate debt so that doesn't help a lot. In this scenario though, SPARCS would recover $65M AUD of value, and BEPPA is still worthless.

Now let's step up our assumptions and assume that DBCT can get a 10 multiple against the 2010 estimate. That gives a $2.2B sale price, definitely low, but I am modeling distress, right? Now SPARCS recovers in full and BEPPA gets a 24 cent recovery *if* we can partition assets in administration and force non recourse debt to accept losses against net equity value. That's hardly a spectacular return against the risk of total loss, buying in at the current 13 cents value.

Step up the assumptions again and apply an 11 multiple for DBCT. That gets us to a $2.4B sale and in the case I ignore assets with negative values that only have non recourse debt, I calculate a 51 cent recovery on BEPPA.

Step up assumptions again and apply a 12 multiple for DBCT and if the non recourse lenders can be made to eat their losses, then we get total recovery on BEPPA.

I want to caution that my EBITDA numbers above (except for DBCT) were based on BB's 2011 "distress" multiples. I have NOT done the work to verify these numbers. Some of them seemed a little high to me, and others seemed a little low, and I am ignorant enough about the basis for them that my judgements are probably not trustable yet. I wasn't willing to use BB's 2011 estimate for DBCT, just to be conservative. 2010 is so much higher than 2009 in any case that it is already aggressive (but it's appropriate given the recent completion of the expansion of DBCT).

The conclusions I get from this analysis:

1) You don't have to be insane to come up with a $0 valuation for BEPPA in a distress situation. All it takes is a realists understanding about which of these assets are cyclical assets and likely to get low multiples in a distress sale.

2) If we can reasonably argue for a 9 multiple on the pipelines, then things look up a little and we get better recoveries. On some of the US natural gas pipelines I was calculating 8 to 11 multiples on EBITDA, so 9 is not crazy. But this change by itself gets us to 36 cent recovery on BEPPA (but *only* if losses on assets with non recourse debt don't spill over to other assets).

3) As if I needed to say it: it really does all come down to DBCT. The bull case is clear: it's a world class asset in a moment of high utilization that many coal companies would kill to own. The bear case is also pretty clear to me: the buyers are huge sophisticated companies that understand full well how badly BBI needs this sale. If they stall the sale, wait for administration, and then conspire together as bidders to form some kind of "joint venture" whose purpose is to remove competition from the bidding process, and then pass on low costs to all coal companies in the "joint venture" then this asset's price could get walked way down.

I ran some hybrid case numbers that better represent my own beliefs about where the key asset values might end up in distress. I gave DBCT a 10 multiple and NGPL a 9 multiple. That gives partial recovery around 52 cents for BEPPA *if* the assets with only non recourse debt cannot carry their losses outside their assets.

Given the extreme speculative nature of some of this, I would be a buyer of BEPPA around six cents. Unless we get bad news around Euroports, it doesn't look like I will get my chance.

On the other hand, if we get a DBCT announcement with a big number and the market under-appreciates the impact, maybe I'll get a chance to play again. Not likely, but at least now I have a model for it.

 

[nathanblack]

interesting post. when you mention cyclical downturns did you consider the regulated nature of many of BBI revenue streams? were you compring BBI assets with regulated or non regulated assets? this can vary asset to asset and be country specific in nature.

als did you consider the impact of a minority DBCT sale? its a serious possibility that only 49% will be sold. what would happen then?

i agree euroports relies on a strong economy, but other assets have a regulated income stream.