BBI - Babcock & Brown Infrastructure

[banska bystrica]

There will no quick re-rating of the BBI or BEPPA share price. Have a look at what some listed REIT's are trading at and the similarities are obvious.

Fund Name Price-to-Net Tangible Asset
Value per share (NTA)

APN European Retail Property 6%
Centro Retail Trust 5%
Galileo Japan Trust 6%
ING Industrial Fund 7%
ING Real Estate Community Living 5%
Macquarie CountryWide Trust 12%
Macquarie DDR Trust 3%
Mirvac Industrial Trust 12%
Reckson New York Property Trust 11%
Valad Property Group 5%

Average 7%

From Orbis Funds management:

"These REITs offer extraordinary value. You can basically buy these REITs for less than 10% of their latest independent valuations (net of associated debt), and well below the cost of building. Net income (excluding any items of an unusual nature) is more than 100% of the purchase price. While debt levels are higher than one would like, rentals, on average, cover interest twice. Many REITs have decided to slash distributions (effectively dividends paid to investors) and retain the cash to reduce debt, a sensible
strategy in our opinion and one which will reduce future risk. Nevertheless, with only 20% of profits paid out, we estimate the average distribution yield will be over 20%.
The two major risks for investors are that banks refuse to renew the REITs’ loans when they mature and tenant bankruptcy. Since they are still covering their interest easily and are reducing rather than increasing debt, we think it very likely that the banks will roll the debt forward. In fact, in December, a large consortium of banks extended Centro Retail Trust’s debt for two years despite it being one of the most leveraged players. Directors have also been significant buyers of a number of these shares in the last quarter. The risk of tenant bankruptcy is higher than usual given the weak economic conditions,
however this risk is very diversified.
Perhaps it is easier to see the value by reducing the parameters above into a single building. Take a building that costs $1 million to build and generates $70,000 in annual rental income with leases fixed for six years (the average length of leases in the table above). The building has a $570,000 mortgage which you have to take over with interest costs of $35,000 per annum. The equity should be worth $430,000 with annual pre-tax income of $35,000. The market currently offers this opportunity to us for somewhere between $30,000 and $40,000, down from more than $500,000 last year.
So while we are deeply disappointed by the losses suffered in 2008, we think that, in some cases, markets have hugely overreacted presenting investment opportunities which have not been available for decades. It is impossible to tell when markets will recover, but even if a recovery in prices is not forthcoming, income yields are very likely to exceed cash returns by a wide margin. When the recovery happens, the upside, as some of these values move to more normal levels, is very high."

Now I would put forward an argument that BBI is in a stronger position than the REIT's listed. What would you rather own in a severe recession? A diversified, 75% regulated portfolio of essential infrastructure assets or commercial property? On that basis, BBI should be trading at higher than the REIT average of 7c in the dollar and BEPPA should be even higher still.

Patience everyone. This will take a long time.

 

[random]

It is great to read the informed valid commentary in this forum especially over recent days.
I have learnt a lot about beppa and their position in the pecking order etc.

In relation to the sp however the price reflects the risks and the markets perception of the likelihood of survival for bbi (as simple as that i feel). Unless there is no question that bbi will survive the price will languish and most are looking no further than that. (Then we can get to banska bystricas 40c and beyond).
Yes, we have great assets and they do provide and will provide considerably more returns in coming years, with i am sure wonderfull dividends but will they survive the next year?
Once we establish this in the market place wer'e off.
I have no doubt that we will, most of us here on this forum believe this also but the general investor is yet to be convinced hence our current situation.

Personally i am waiting for two pieces of news.
1) The sale of a piece of dbct or another part asset.
2) An update on our future obligations and payments to bnb.

Has anyone heard an update about the management fees?

 

[banska bystrica]

Random,
You're right about what the market's view is. The market is pricing BBI for liquidation. If the market is right, BBI/BEPPA holders probably lose the lot in a firesale of assets. Mind you, I find it hard to see banks implementing a firesale on ports and gas pipelines. It's a bit different to selling vacant commercial/residential properties.
Anyway, getting back to the point. If the market is right in pricing BBI at 6.5c, then we are probably stuffed. If the market is wrong through fear, panic and irrationality, then we make a fortune.
Personally I am quite comfortable if the BBI price does nothing for a long time, so long as they survive this global nightmare and come out the other end. When this deep recession does eventually end, the bounce back in the stocks that have survived will be impressive.

 

[banska bystrica]

The fact that the bank has formally ordered BBI to pay down corporate debt from asset sales/free cash flows is very positive for BEPPA (because the only thing that can render BEPPA worthless is failure to pay down corporate debt whilst in administration.) Whilst I am sure management were always going to do that anyway, now that the bank has insisted on this sweep facility, there is no way management can ever deviate from that strategy.
I see little chance of BBI's share price getting to even 40c before 2011 UNLESS they sell 100% of DBCT and 100% of their 26% holding in NGPL. This would change everything as corporate debt would be nil.
The best scenario for BBI is to sell as many assets at book value as possible. Even if it means you are left with maybe two assets and zero debt at the corporate level and asset level. The only catalyst for the BBI share price to go up now is asset sales.

 

[random]

I am confident that whatever the price we sell part or the whole of dbct for it will be above book value.

Yes, we are in tough times (and I'm not referring to bbi here) but the coal terminal is a jewel to certain parties and they know it. Even though they know that we know it - if you get my drift.
There can be a lot of blough and procrastination but these parties are aware that an opportunity missed here will be one that they will be unlikely to have the good fortune of being presented with again.
Some of the parties have healthy amounts of cash in their purse and there is nothing wrong with paying a fair price for an asset in these times. Especially when it fits so nicely into their business model.
One doesn't have to get a bargain and screw the seller to get a good deal all the time.
Both parties don't have to be just ok with deal either.
Indeed, there is nothing wrong with both parties actually being very happy with the sale/purchase - of this asset in particular.

This is not just another asset - it is in my opinion a special case.
I also have confidence in our directors which helps matters considerably.

Here endeth my rant!

 

[banska bystrica]

"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.

 

[random]

Today many holders who do not take an active interest in bbi received notification of the 1/2 year results.
Newspaper reports have also given short stories on BBI quoting not much more than the figure $245 mill.
BBI posts a 1/2 year loss of $245 million (no mention as to why). This is the be all end all for many right now.
The circumstances and additional info detailed and posted in the report is of no interest to them.
The overall sentiment in the market today has not helped today either.
This is playing a role in todays movement downward in BBI.

On the positive side here were a number of individual purchases today for 7 figure amounts in bbi shares.

Like Banska i will be rich or i will be poor when the bbi game is played out in full. (well.... not quite as rich)





I have increased my holding by 20% today.

 

[banska bystrica]

A small mongoose like creature said this over the road: "surely it's not whether Merrill's are right or wrong - but the fact that they said it? - so did UBS and that's why the sell off.... BBI urgently needs a sale to ward off further sp erosion? never mind most debts are some time away from needing to be paid, the market wants some BBI cred right now.... or else...."

Has anyone else heard so much rubbish in all their life? BBI has no covenants relating to market cap therefore share price is irrelevant. The price can go to 1c in the short term. It matters not except short term traders like the small mongoose type creature who are now caught in the stock will wet their pants. Long term holders breathe easy. BBI is doing fine with the APR plan.

 

[hardyakka]

I have just read the information regarding the sp movement today and I want to make sure I have my facts right.

Two analysts basically predicted that BBI would not be able to pay its debts in Nov 2011, the proceeds of DBCT being discounted by one analyst by 50% below book, him reducing the estimate of sp from $1 to 10 cents.

Now these two esteemed analysts are from entities that have virtually gone to the wall (and required multi billion dollar bailouts) because they were unable to recognise the inherent risks in the products they were actually selling, now called toxic debt.

Can someone please explain why these analysts were unable to see these risks etc, yet are able to give a valid view on events nearly 3 years in the future on a fund owning assets when they only have access to the same published information that you are I do? (To provide an analyst with information not in the public arena is a breach of continuous disclosure regime).

Also can someone explain how these analysts have a much greater understanding of the intricacies of operating a multi billion $ infrastructure business, ie BBI, than management and the board does? (Lets ignore the fact that the financials are audited).

To diverge I have seen comments on charting. Charting can indicate trends in a normal market, however this is not a normal market. For example look at the spread between sovereign debt and the cost of debt to banks, it remained constant until mid 2007, then went totally haywire. Charting has its place as a tool, but it is one tool only of many, like statistics.

Like most I rely on my own analysis, but that must be wrong because an analyst at two very failed banks says so, or am I missing something here?

Cheers

 

[TheAbyss]

The very same analysts were claiming all was well with the world a year ago and recommending we buy various stocks all the way down. They know little more than the rest of us unless they have been invited to sit in on senior board meetings etc which they are not. Most analysts receive a printed sheet and a 15 minute discussion with very well defined terms of reference.

I understand there are owners of BBi/Beppa who are keen to see the SP increase etc and derivatives of same lift their net worth but the chart says it all. Why get in until it turns around? A v shaped pattern is a very rare commodity and is usually temporary. Wait fo rthe base and upturn before committing your funds people or you may be left with no ammunition when the time comes to recover lost ground and further the advancement.

This thread is fast becoming a support group for the terminal imo (dont be offended, i am happy to be proven wrong in time. This is only my opinion and i am allowed to have one).

Good luck to all however stick to the facts and do not become emotionally attached to an idea or value you have placed on something. In the end the market will decide and only the strong will survive.

 

[banska bystrica]

All views welcome.
What facts imply BBI is "terminal"? Please do not say the "chart". The chart said the same for Burns Philp at 1c.
Give me some facts from the reported financials that indicate BBI is gonzo.

 

[dogby]

"the chart says it all. Why get in until it turns around?"

Abyss,
According to your chart, the sp turned around 2 -9 feb. If you had started buying then, you would be dissappointed now.

I would like to believe in the predictive power of charts, but I am yet to be convinced.

 

[TheAbyss]

All views welcome.
What facts imply BBI is "terminal"? Please do not say the "chart". The chart said the same for Burns Philp at 1c.
Give me some facts from the reported financials that indicate BBI is gonzo.

Interesting that you prefer to hang your hat on a hail mary play such as Burns Philp rather than the irrefutable hard facts a chart provides you.

Sure there are varying modes of investment from intraday to long term and each to their own. My point is BBI is extreme high risk and the general tone within the thread is of a support group with closed ranks who will hear no ill and praying for a turnaround. Hope it does turn around, just cant see it happening until a major sell off of assets and a company restructure which does not involve borrowing money, inflating the value of said asset and flogging units off to the general public and charging a generous commission for doing so.

The chgart says quite clearly that BBI is in trouble and may take a very long time to recover if it ever does.

Says it all really.

 

[TheAbyss]

"the chart says it all. Why get in until it turns around?"

Abyss,
According to your chart, the sp turned around 2 -9 feb. If you had started buying then, you would be dissappointed now.

I would like to believe in the predictive power of charts, but I am yet to be convinced.

That turn around you highlight could also be described as a lower high within a downtrend. Each to their own and good luck with your investment.

Fundamental trading may not be a profitable one in the current climate.

 

[banska bystrica]

Still waiting with baited breath for some FACTS that support the notion BBI is a goner. I guess they will not be forthcoming. Maybe because they don't exist?
Hang on. The chart looks ugly. I better sell. Give me a break. I prefer to base my investment decisions on financial facts rather than lines on a piece of paper with 25 different scenarios depending on which way the short term price goes.
Ah I see a "descending triangle" or a "head and shoulder" or a blah blah blah mumbo jumbo. The chartists actually all joined in BBI at 12c if you remember because it had "broken the 10/11c resistance three times. Smart move by the chartists there. Now the chartists want to tell us it's "history". Buy at 12c, sell at 5c. Good way to go broke.

 

[alphaman]

Reported financials are useful, I don't trade without first going through them.

But reported financials are the results of a lot of judgement and estimates. Just adjust one assumption, you can change the asset value all over the place.

In BBI's case, the instos are obviously using a different set of assumptions to value BBI's assets. They could be wrong, but the fact is BBI is now held hostage by the banks. Hopefully BBI will work its way out, but it's never a good situation to be in.

 

[TheAbyss]

Each to their own and time will tell.

I dont see any news on how they will turn the company around to support any increase in their EPS so what will break the downward trend?

I need no facts to support my position as the share price says it all. I want to know why you believe it will ever turn around other than a miracle rerating of its assets which is not going to happen in this climate.

 

[banska bystrica]

This was posted: "They would be better off selling 100% of DBCT and despatching all of their corporate debt now, forever. Then they can get on and trade their way out and build up cash to payout bonds and hopefully have something left for the prefs."

If they haven't got the $700M in cash for the BEPPAs in 2012 and the BBI share price is too low, they will offer more attractive terms to BEPPA holders to roll over for another period. The Directors have the power to do that so this nonsense of massive dilution in 2012 is pie in the sky uninformed rubbish. THERE WILL BE NO DILUTION.

 

[blue2]

If they haven't got the $700M in cash for the BEPPAs in 2012 and the BBI share price is too low, they will offer more attractive terms to BEPPA holders to roll over for another period. The Directors have the power to do that so this nonsense of massive dilution in 2012 is pie in the sky uninformed rubbish. THERE WILL BE NO DILUTION.

Unless BEPPA divs are paid before then I dont think there would be too many acceptances of new terms. Whats the point of accepting a high interest rate if it doesn't get paid?

 

[drsmith]

There will no quick re-rating of the BBI or BEPPA share price. Have a look at what some listed REIT's are trading at and the similarities are obvious.

Fund Name Price-to-Net Tangible Asset
Value per share (NTA)

APN European Retail Property 6%
Centro Retail Trust 5%
Galileo Japan Trust 6%
ING Industrial Fund 7%
ING Real Estate Community Living 5%
Macquarie CountryWide Trust 12%
Macquarie DDR Trust 3%
Mirvac Industrial Trust 12%
Reckson New York Property Trust 11%
Valad Property Group 5%

Average 7%

From Orbis Funds management:

"These REITs offer extraordinary value. You can basically buy these REITs for less than 10% of their latest independent valuations (net of associated debt), and well below the cost of building. Net income (excluding any items of an unusual nature) is more than 100% of the purchase price. While debt levels are higher than one would like, rentals, on average, cover interest twice. Many REITs have decided to slash distributions (effectively dividends paid to investors) and retain the cash to reduce debt, a sensible
strategy in our opinion and one which will reduce future risk. Nevertheless, with only 20% of profits paid out, we estimate the average distribution yield will be over 20%.
The two major risks for investors are that banks refuse to renew the REITs’ loans when they mature and tenant bankruptcy. Since they are still covering their interest easily and are reducing rather than increasing debt, we think it very likely that the banks will roll the debt forward. In fact, in December, a large consortium of banks extended Centro Retail Trust’s debt for two years despite it being one of the most leveraged players. Directors have also been significant buyers of a number of these shares in the last quarter. The risk of tenant bankruptcy is higher than usual given the weak economic conditions,
however this risk is very diversified.
Perhaps it is easier to see the value by reducing the parameters above into a single building. Take a building that costs $1 million to build and generates $70,000 in annual rental income with leases fixed for six years (the average length of leases in the table above). The building has a $570,000 mortgage which you have to take over with interest costs of $35,000 per annum. The equity should be worth $430,000 with annual pre-tax income of $35,000. The market currently offers this opportunity to us for somewhere between $30,000 and $40,000, down from more than $500,000 last year.
So while we are deeply disappointed by the losses suffered in 2008, we think that, in some cases, markets have hugely overreacted presenting investment opportunities which have not been available for decades. It is impossible to tell when markets will recover, but even if a recovery in prices is not forthcoming, income yields are very likely to exceed cash returns by a wide margin. When the recovery happens, the upside, as some of these values move to more normal levels, is very high."

Now I would put forward an argument that BBI is in a stronger position than the REIT's listed. What would you rather own in a severe recession? A diversified, 75% regulated portfolio of essential infrastructure assets or commercial property? On that basis, BBI should be trading at higher than the REIT average of 7c in the dollar and BEPPA should be even higher still.

Patience everyone. This will take a long time.

The key to successful investments in the REIT's listed above will be to pick survivers, if any.

REIT's and infrastructure funds will over the next few years become much more conservative investments with much less debt. Those who are unable to adapt will perish. Recapitalisations Centro style are possible but this solution leaves little equity for existing shareholders and hence very little upside in a recovery.

Other things to consider that are not covered in the above report on REIT's are,

1) Further property devaluations are anticipated by the market and these are magnified by the gearing. This is one reason for the large discount to NTA.

2) Potential for reduced income as the downturn bites.

3) Impact of increased interest margins on debt servicing costs.

4) With regard to Centro's refinancing the banks may have been motivated more by fear than confidence. Consider what may have happened to commercial property valuations had Centro's large portfolio been dumped at fire sale prices. In terms of where property valuations go this may only delay the inevitable but it will buy time for the lenders.