BBI - Babcock & Brown Infrastructure

dhukka · 5 March 2009

banska bystrica said:
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. The "loss" was a mark-to-market adjustment. The "loss" will never be realised.
On my numbers, NPAT in 2010 will be $180M and 2011 $220M. I'm a bit conservative as Wilson HTM have 2010 and 2011 NPAT at $193M and $234M respectively. That puts them on a P/E of less than 1.

What people are focusing on now are all the negatives and doomsday scenarios and I understand that because they are fearful and shell-shocked at what has happened in the last 9 months. I understand all that but feel it has created an enormous opportunity that we will probably never see again. This is the mother of all bubble busts and as such, the market has overreacted on the downside just like it over-reacted on the upside. Sure BBI has risks but but that's why it's 4.5c and not 45c. This stock is not getting re-rated anytime soon. However, the long term investor will be handsomely rewarded.

BBI made nothing in 1H09 and nothing in FY08, when your NPAT has a negative sign in front of it, it's a loss and means you made nothing.

Take a look at the balance sheet, shareholders equity has been eroded, MTM losses do matter. they have reduced equity and therefore the value of the business.

BBI may well make money in 2H09 and FY10 and it may well be worth more than $0.045 but it is still a very medicore business on the basis of the returns it generates, even assuming Wilsons Forecasts for FY10 and FY11.

banska bystrica said:
I bought a stock on the NASDAQ last night that is trading at less than cash backing and is debt free. Opportunities like those come up once in a lifetime. I took the opportunity, bought the stock and will throw it in the bottom drawer. If it's not a twenty bagger in the next decade, I'll give the game away. A $50K investment that I expect to be worth a million inside a decade.

Congratulations, do you want a medal or a chest to pin it on?

hardyakka · 5 March 2009

dhukka said:
Interesting that the company didn't write down the value of any of their assets at the half year. It is clear that the company paid too much for their assets as evidenced by the massive amounts of goodwill on the balance sheet (some of which has disappeared with subsequent sales) and the extremely poor returns they get form those assets using any measurement you like, such as ROE, ROA or ROIC.

If you want to make the claim that the assets in the balance sheet are valued fairly, you first have to believe that during an asset bubble driven by excessively cheap leverage that somehow BBI didn't get caught up in the fervor and paid sensible prices. A hard case to make in light of the fact that they were one of the biggest participants in the orgy of cheap credit and again, the excessive amounts of goodwill and other intangibles on the balance sheet.

Secondly you have to think that BBI management are hopelessly incompetent. Why buy assets that deliver returns that are worse than you can get by putting your money in the bank at 4.5% interest? This is not to say that the assets are of poor quality, just that management horribly overpaid, the cash generation ability of the assets does not justify the price paid for them. If BBI had paid sensible prices for assets that produced good returns, they wouldn't need to sell-off assets.

IMO the auditors would have paid the closest attention to the asset values and if there was any doubt whatsoever as to the carrying value of the assets then we would have seen an impairment charge in the financials. You only need to compare the impairment charges applied to the bluechips such as Westfield to appreciate the attention these would have been given.

Cheers

banska bystrica · 5 March 2009

dhukka said:
BBI made nothing in 1H09 and nothing in FY08, when your NPAT has a negative sign in front of it, it's a loss and means you made nothing.

Take a look at the balance sheet, shareholders equity has been eroded, MTM losses do matter. they have reduced equity and therefore the value of the business.

MTM is an accounting loss which will never be realised. This is infrastructure and as such FCF is the most accurate guide to valuation. It is quite obvious that you have no real understanding of the underlying business or it's balance sheet or it's assets. The facts are it has net equity of $1 per security with ZERO asset impairments and the market has factored in a 95% discount to NAV. On any reasonable metric, that is VALUE with a CAPITAL V.
There are obviously plenty who agree with your uninformed view. That's why they are 4.5c. I thank each and everyone of you for providing me with this once in a lifetime opportunity. We will see where BBI are trading at in a couple of years.

banska bystrica · 5 March 2009

How could anyone possibly justify asset impairments when cash flow was positive on the pcp and recent asset sales have ALL been above book?

The auditors are well aware of the quality of these assets and their ability to weather a global recession.

hardyakka · 5 March 2009

dhukka said:
BBI made nothing in 1H09 and nothing in FY08, when your NPAT has a negative sign in front of it, it's a loss and means you made nothing.

Take a look at the balance sheet, shareholders equity has been eroded, MTM losses do matter. they have reduced equity and therefore the value of the business.

BBI may well make money in 2H09 and FY10 and it may well be worth more than $0.045 but it is still a very medicore business on the basis of the returns it generates, even assuming Wilsons Forecasts for FY10 and FY11.

Congratulations, do you want a medal or a chest to pin it on?

All companies have periods when they have short term problems, even BHP (Magma Copper, briquet plant in WA). It seems that your approach is that of a short term investor. Others adopt the longterm approach and hence daily/weekly/monthly fluctuations in price are irrelevant.

IMO for the degree of risk it carries BBI offers outstanding value, this being affirmed by the financials and its performance in the GFC. Also understand a regulated infrastructure business is a defensive investment, so you should never expect wild fluctuations in returns.

Before you jump in and point out the level of debt etc, yes I agree these are high and as stated there is a degree of risk. But as I said, IMO one of the best investments on the market.

Consider if you put your money in the bank after tax and inflation you are actually going backwards. But then each has their own objectives and risk appetites.

Cheers

dhukka · 5 March 2009

banska bystrica said:
MTM is an accounting loss which will never be realised. This is infrastructure and as such FCF is the most accurate guide to valuation. It is quite obvious that you have no real understanding of the underlying business or it's balance sheet or it's assets. The facts are it has net equity of $1 per security with ZERO asset impairments and the market has factored in a 95% discount to NAV. On any reasonable metric, that is VALUE with a CAPITAL V.
There are obviously plenty who agree with your uninformed view. That's why they are 4.5c. I thank each and everyone of you for providing me with this once in a lifetime opportunity. We will see where BBI are trading at in a couple of years.

It is obvious you have no understanding of how accounting losses affect the balance sheet and therefore the value of the business. I guess all those mark to market losses by US banks are of no significance? FCF is not the most accurate guide to valuation. It always makes me laugh when people insist that such and such a method should be used for certain businesses. Why not value them all the same way? How about ROE or ROC? on that basis BBI is a very mediocre business generating very poor returns and whilst its value may well be much higher than 4.5c but based on current fundamentals it is worth well south of $1.

dhukka · 5 March 2009

banska bystrica said:
How could anyone possibly justify asset impairments when cash flow was positive on the pcp and recent asset sales have ALL been above book?

The auditors are well aware of the quality of these assets and their ability to weather a global recession.

You could easily justify it on the basis that BBI's return on assets is woeful which implies that they are not performing to expectations or that they are performing well and that management significantly overpaid for them. Or better yet management are complete idiots who think sub 5% rates of return are good.

dhukka · 5 March 2009

hardyakka said:
All companies have periods when they have short term problems, even BHP (Magma Copper, briquet plant in WA). It seems that your approach is that of a short term investor. Others adopt the longterm approach and hence daily/weekly/monthly fluctuations in price are irrelevant.

IMO for the degree of risk it carries BBI offers outstanding value, this being affirmed by the financials and its performance in the GFC. Also understand a regulated infrastructure business is a defensive investment, so you should never expect wild fluctuations in returns.

Before you jump in and point out the level of debt etc, yes I agree these are high and as stated there is a degree of risk. But as I said, IMO one of the best investments on the market.

Consider if you put your money in the bank after tax and inflation you are actually going backwards. But then each has their own objectives and risk appetites.

Cheers

What do you mean even "even BHP has problems", BHP frequently has problems as do most resource companies as their fortunes are hitched to volatile commodity prices. BHP has enjoyed it's best run ever in the last few years, prior to the 2000's BHP continually had problems.

I am a long term investor and the company's fundamentals do not make it investment grade in my book. I agree it is worth a speculative punt, it is being priced for liquidation and if it actually survives and continues to eke out the paltry returns forecast by bb it will probably be worth more than 4.5c.

banska bystrica · 5 March 2009

Everything has a price. It's all about risk/reward. The market overdid BBI at the peak when trading at $2.07 and now the market has overdone it on the slide at 4c. The beauty of it being 4c is that the leverage from here is huge.

If BBI survive this GFC (and all the evidence points to survival, albeit with less assets and less debt), then BEPPA is worth $1 + accumulated interest payments in 2012. That's not a bad return from 5c.

Just because something is risky, doesn't mean it's a bad investment. It depends on price.

mark_au · 5 March 2009

dhukka said:
Interesting that the company didn't write down the value of any of their assets at the half year. It is clear that the company paid too much for their assets as evidenced by the massive amounts of goodwill on the balance sheet (some of which has disappeared with subsequent sales) and the extremely poor returns they get form those assets using any measurement you like, such as ROE, ROA or ROIC.

If you want to make the claim that the assets in the balance sheet are valued fairly, you first have to believe that during an asset bubble driven by excessively cheap leverage that somehow BBI didn't get caught up in the fervor and paid sensible prices. A hard case to make in light of the fact that they were one of the biggest participants in the orgy of cheap credit and again, the excessive amounts of goodwill and other intangibles on the balance sheet.

Secondly you have to think that BBI management are hopelessly incompetent. Why buy assets that deliver returns that are worse than you can get by putting your money in the bank at 4.5% interest? This is not to say that the assets are of poor quality, just that management horribly overpaid, the cash generation ability of the assets does not justify the price paid for them. If BBI had paid sensible prices for assets that produced good returns, they wouldn't need to sell-off assets.

i find it amazing and intriguing that presented with the same "factual "information sources (financial report etc) that two people (dhukka and banska bystrica in this case) can have such opposing views. Humans are truly interesting and complex beings ;-)

It would seem logical that given the same information, there would be degrees of interpretation around some vague areas, but the general analysis should be in the same direction...

Im loving this forum and its valuable opinions

banska bystrica · 5 March 2009

To uninformed people who just read bad press, I say look at the FACTS.

NGPL was the most recent purchase in 2007 and they paid 10.7X EBITDA. They got a bargain. SEC Gas transacted in the same year for 14X EBITDA. BBI did not overpay for their assets. The market perception is they did because of the BNB connection but the facts are they paid reasonable prices.
Euroports was a recent purchase yet they recently sold a portion for a tick above purchase price.
There is a lot of BS in the market and press about BBI.
You cannot deny the facts as presented above on NGPL unless of course people believe the ASX releases and contracts signed between BBI and NGPL are all just made up. People are scared and they are jumping at shadows. Pretty typical behaviour in a bear market.

alphaman · 5 March 2009

mark_au said:
It would seem logical that given the same information, there would be degrees of interpretation around some vague areas, but the general analysis should be in the same direction...

That's why the market exists. Seller thinks it's overvalued, buyers thinks otherwise. If everyone shares the same view there would very little market activity.

But in this case, I have to say I'm a bit surprised that it even needs arguing. Just look at BBI's income and operating cash flows, divide them by assets. Answer is unequivocal, BBI's profitability is tiny on both income and cash basis. It's all in the reported financials. Very simple maths.

I can borrow tonnes of money to buy a high quality asset, but so what? When I'm only getting 3% return, is it great business? Now I have to try to sell the asset to pay off my loan. Start with nothing, ends with nothing. This is what the credit bubble is about.

hardyakka · 5 March 2009

dhukka said:
I am a long term investor and the company's fundamentals do not make it investment grade in my book. I agree it is worth a speculative punt, it is being priced for liquidation and if it actually survives and continues to eke out the paltry returns forecast by bb it will probably be worth more than 4.5c.

I have no problems whatsoever if BBI does not make investment grade "in your books". From what you have said I assume your portfolio consists of the safe blue chips such as WOW and similar. I think that is safe, secure and wise strategy and you will sleep well at night.

I would like to point out a few BBI facts:
a) The financials state that BBI is cashflow positive. (Lets not waste time discussing accounting profit and cash.non-cash adjustments such as IFRS, depreciation etc).
b) My recollection of the audit report was that there was no going concern qualification, hence the auditors do not seem to concur with your liquidation view.
c) Your comment that the market is pricing BBI for liquidation has a fundamental flaw. It assumes that the market is 100% right all of the time. If the market was we would sell when the price was dropping and buy when it was rising. We all know that markets are at times imperfect, that is what creates arbitraging opportunities. The BBI mispricing is the result of a major flaw in a very unusual market.
d) Inputs into a market that cannot be modelled include fear and greed, very simply people are running scared. This coupled with an extreme market creates greater opportunity for profit or loss.

To summarise your view of liquidation is inconsistent with the financials and markets are imperfect, especially in volatile times. This combined with the human factors creates abnormal mispricing scenarios of which BBI is one.

Cheers

random · 5 March 2009

Looking back at the sp say 4-5months ago is equivalent to looking at ancient history for me. So much has changed in the financial world.

What does intrigue me however is that a few weeks ago bbi was at 14c. Can someone please tell me what news has there been to justify the drop to todays prices.
What has changed? Have we misplaced an asset somewhere? Did our cash flow find a drain to run down that we didn't know about?
Was there something in the report I missed?
Or is it just people snowballing the panic.
I'd love an answer please.

Pleased to be able to top up myself though.

banska bystrica · 5 March 2009

You have two big instos who have clients selling BBI/BEPPA on the back of their analysts downgrading BBI to "underperform". Now if you know how instos work it is easy to explain the drop in share price. They sell at whatever price when the analyst says "underperform". The retail buyers just do not have the firepower to withstand the relentless insto selling. The instos do not care about whether they are selling a value stock or not. They honestly would know less than most about the prospects of BBI. It would be a very small percentage of their portfolio and as such, does not rate. Their attitude would be "Just sell".
We saw the same when Deutche were selling in November. They just sold relentessly down to 2.4c until they were done.
I saw this in the early 90's with a tech stock I was very keen on. SCS was the code. AMP decided to sell around 30c. By the time they had nearly finished, the price was 10c. A group of private investors including myself approached AMP to buy out their remaining shares in one big crossing at 7c. They agreed. The stock was crossed at 7c and we sold our stake years later for $1+.

dhukka · 5 March 2009

hardyakka said:
I have no problems whatsoever if BBI does not make investment grade "in your books". From what you have said I assume your portfolio consists of the safe blue chips such as WOW and similar. I think that is safe, secure and wise strategy and you will sleep well at night.

I would like to point out a few BBI facts:
a) The financials state that BBI is cashflow positive. (Lets not waste time discussing accounting profit and cash.non-cash adjustments such as IFRS, depreciation etc).
b) My recollection of the audit report was that there was no going concern qualification, hence the auditors do not seem to concur with your liquidation view.
c) Your comment that the market is pricing BBI for liquidation has a fundamental flaw. It assumes that the market is 100% right all of the time. If the market was we would sell when the price was dropping and buy when it was rising. We all know that markets are at times imperfect, that is what creates arbitraging opportunities. The BBI mispricing is the result of a major flaw in a very unusual market.
d) Inputs into a market that cannot be modelled include fear and greed, very simply people are running scared. This coupled with an extreme market creates greater opportunity for profit or loss.

To summarise your view of liquidation is inconsistent with the financials and markets are imperfect, especially in volatile times. This combined with the human factors creates abnormal mispricing scenarios of which BBI is one.

Cheers

Hardyakka, instead of making assumptions and straw man arguments, I suggest you actually read my posts rather than reacting on emotion. Firstly you are completely wrong with respect to the kinds of companies I have in my portfolio.

Secondly it is NOT my belief BBI will be liquidated, I have no view one way or the other, I simply don't know. My point is that at 4.5c the stockmarket is pricing it with a stong possibility that it is going out of business.

Thirdly, I absolutely reject the Efficient Market Hypothesis, the stock market is wrong at least as much as it is right, my view is that the stock market is pricing the stock as though there is a good chance the company may not be around in 12 months time. Again I don't necessarily agree with that view. I have enough humility to say that I honestly don't know.

My main point all along is that this is a mediocre business that generates mediocre returns, a point that none of the BBI supporters have been able to refute, because it is indisputable.

I will concede that if BB's forecast profits for FY10 and FY11 are realized then the stock is most probably worth more than 4.5c, but forecasts of earnings 18 months out, are pie in the sky stuff in the current environment.

BearCuban12 · 5 March 2009

You have two big instos who have clients selling BBI/BEPPA on the back of their analysts downgrading BBI to "underperform". Now if you know how instos work it is easy to explain the drop in share price. They sell at whatever price when the analyst says "underperform". The retail buyers just do not have the firepower to withstand the relentless insto selling. The instos do not care about whether they are selling a value stock or not. They honestly would know less than most about the prospects of BBI. It would be a very small percentage of their portfolio and as such, does not rate. Their attitude would be "Just sell".
We saw the same when Deutche were selling in November. They just sold relentessly down to 2.4c until they were done.
I saw this in the early 90's with a tech stock I was very keen on. SCS was the code. AMP decided to sell around 30c. By the time they had nearly finished, the price was 10c. A group of private investors including myself approached AMP to buy out their remaining shares in one big crossing at 7c. They agreed. The stock was crossed at 7c and we sold our stake years later for $1+.

Banksa - when can we expect your return to HC? Is the suspension over yet? cheers

banska bystrica · 5 March 2009

I'm still suspended until tonight. I have read most of the posts over there and to be honest, the quality has dropped off markedly. dargie is still going on about the death spiral etc and I don't feel inclined to even respond to rubbish like that.
I can tell you categorically the market is not interested in what is happening next month let alone 2012.
The important thing to remember is that a 50% sale of PD Ports and 50% sale of DBCT will render BBI "out of the woods". I personally believe there is enormous interest in DBCT and there is sufficient interest in PD Ports to be able to sell 50% at prices above what BBI paid for it in 2005.

"B&B Infrastructure yesterday told Bloomberg it was considering selling PD Ports. Despite falling asset prices, bankers close to the sale were hopeful of fetching more than $US1 billion, compared with the $US941.5 million paid for the business in 2005."

These two asset sales would payout about $800M of corporate debt. That would ensure BBI's survival. They are also generating enough free cash to pay down another $500M of debt by 2011. With stable markets by then and corporate debt wiped out to almost zero, BBI will be back above the 50c level and BEPPA around 65/70c.
The NTA is $1. Simple as that. It's not a BS figure. Its assets are not impaired like a Centro or BNB of GPT. These are 75% regulated assets with stable cash flows. Just look at the result. Very solid. The market is pricing them at 4% of NTA. That is plain crazy and I am still buying BEPPA at 5/5.1c and will continue to keep accumulating whilst I've got other stocks to sell.

Remember in November I said it was the opportunity of a lifetime. I still believe that. When are you going to be able to buy $1 worth of net assets for 4c again?

drsmith · 5 March 2009

According to page 28 of BBI's half year report, net asset backing is $1.00 per security. No mention of tangible there.

Page 29 has net tangible assets at $0.69 per security but this counts certain assets as tangible which under A-IFRS are classified as intangible.

The balance sheet clearly shows net tangable asset backing to be negative. That's not to say that the goodwill and intangables are without value but let's not confuse them with tangible assets.

By comparison GPT is carrying very little in the way of goodwill and intangibles on it's balance sheet.

banska bystrica · 5 March 2009

Dalrymple Bay Coal Terminal (DBCT) is intangible. It's a 99 year leasehold asset.
I reckon it might just be worth a bit more than a commercial property.
EV of $2.4 BILLION for DBCT. Not a bad intangible.

BBI - Babcock & Brown Infrastructure

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