BBI - Babcock & Brown Infrastructure

banska bystrica · 7 April 2009

nomore4s said:
Have you read through the start of the thread lately? Makes for interesting reading, people have been calling for these massive gains for a while.

Well I bought my first parcel at 42c. I then bought another small parcel in the mid 20's.
I then waited and started buying around 6c and then really loaded up the truck below 4c and even snagged 800,000 at 2.5c if you read one of my first posts on BBI in November 2008.

Regarding the risks: I know there are risks but in my mind, the risks are so low they do not justify a share price trading at a 94% discount to NAV and the prefs at a discount of 92%. Pure madness but that's why I'm still buying.

There is a risk DBCT doesn't sell for an acceptable price. LOW RISK in my opionion.
If BBI cannot sell assets, there is a risk that eventually they may breach their debt covenants. LOW RISK if you look at the earnings for each asset.

There is a risk that credit will freeze further. LOW/MEDIUM RISK.

So yes, there are risks, but as I said before, a lot of people think there is a correlation with the share price and risk. There are no market cap debt covenants on BBI. So long as they are paying their interest when it falls due and they are not in breach of the ICR's, then the share price is irrelevant.
I feel sorry for those investors who have paid very high prices for BBI but that is history and what we need to focus on is the future. The current price is 6.5c. Therefore, all our analysis should be on that basis, rather that people's perception of how poor management were when controlled by BNB management.
BNB actually did a great job buying assets of the highest quality and in the case of BBI, they did not pay high prices. BNB and the satellites were a victim of a credit freeze, simple as that. They were not the only directors who failed to see the gravity of what was coming. Forget about prejudices and concentrate on the present and future.

mark_au · 7 April 2009

banska bystrica said:
Well I bought my first parcel at 42c. I then bought another small parcel in the mid 20's.
I then waited and started buying around 6c and then really loaded up the truck below 4c and even snagged 800,000 at 2.5c if you read one of my first posts on BBI in November 2008.

Regarding the risks: I know there are risks but in my mind, the risks are so low they do not justify a share price trading at a 94% discount to NAV and the prefs at a discount of 92%. Pure madness but that's why I'm still buying.

There is a risk DBCT doesn't sell for an acceptable price. LOW RISK in my opionion.
If BBI cannot sell assets, there is a risk that eventually they may breach their debt covenants. LOW RISK if you look at the earnings for each asset.

There is a risk that credit will freeze further. LOW/MEDIUM RISK.

So yes, there are risks, but as I said before, a lot of people think there is a correlation with the share price and risk. There are no market cap debt covenants on BBI. So long as they are paying their interest when it falls due and they are not in breach of the ICR's, then the share price is irrelevant.
I feel sorry for those investors who have paid very high prices for BBI but that is history and what we need to focus on is the future. The current price is 6.5c. Therefore, all our analysis should be on that basis, rather that people's perception of how poor management were when controlled by BNB management.
BNB actually did a great job buying assets of the highest quality and in the case of BBI, they did not pay high prices. BNB and the satellites were a victim of a credit freeze, simple as that. They were not the only directors who failed to see the gravity of what was coming. Forget about prejudices and concentrate on the present and future.

800000 at 2.5 cents, thats an awesome buy, gotta be happy with that one BB.
i have "only" 250,000 bbi varying between 4 c and 24 (ithink) and 120000 of bebba at around 6 c., id like to get more, but my line of credit is starting to max out and i dont want to be too overweight on just one stock

investorpaul · 7 April 2009

skc said:
Paul, consider this as borrowing money (probably at a v.high rate) to invest/gamble on a high risk opportunity, and ask yourself if it complies with your trading / investment plan.

Good luck.

Hi SKC,

I have a long term portfolio and BBI and BEPPA represents my spec stock, I normally hold one or two at a time. I have not invested the full amount I normally do into BBI and BEPPA, but I still have a significant holding.

To me the $900 handout is like money I shouldnt have and I am happy to put that down on BBI/BEPPA. If this 900 was spent of a tv (like Rudd wants us to) then after i take it out of the shop that TV is prob only worth $200, so i can lose my money either way.

Originally I followed this thread as an onlooker and after a while started doing some research into the history/current financial situation/potential future of BBI. Although I doubt i have done as much as Banska I am happy with the amount I have done and the potential risk/reward fits comfortably within my strategy for the amount I have invested.

Would I go and invest another 10x what I have? probably not because then I would be putting too much of my capital into a trade that may or may not work out.

banska bystrica · 7 April 2009

banska bystrica said:
What's BNB going under got to do with BBI. BBI own quality monopolistic infrastructure assets, do not have any debt relationship with BNB, and are not under a forced selling program. They have decided to sell assets only at book value or above to reduce corporate debt.
I cannot see what the panic is all about. Stepped in and bought 800,000 at 2.5c today. Put in the drawer and wait for the credit markets to thaw.

Mark,
What I said in this post in November is still valid. Put them in the drawer. We know that Phil Green was selling out (forced) via Deutche Bank. That gave us the opportunity to acquire very cheap stock in a bit of volume.

skc · 7 April 2009

investorpaul said:
To me the $900 handout is like money I shouldnt have and I am happy to put that down on BBI/BEPPA. If this 900 was spent of a tv (like Rudd wants us to) then after i take it out of the shop that TV is prob only worth $200, so i can lose my money either way.

What I meant was, because you have other debt (e.g. travel), your $900 could have gone towards paying that off. So what you have effectively done is using debt to fund the purchase. Think about it as paying $900 to reduce the debt, then draw on it again to fund the purchase of the shares. Financially that's the same.

I am definitely not advocating you to buy a TV... consumerism is the root of all evil and the whole stimulus solution is like using MacDonalds as the cure for obesity.

investorpaul · 7 April 2009

skc said:
What I meant was, because you have other debt (e.g. travel), your $900 could have gone towards paying that off. So what you have effectively done is using debt to fund the purchase. Think about it as paying $900 to reduce the debt, then draw on it again to fund the purchase of the shares. Financially that's the same.

I am definitely not advocating you to buy a TV... consumerism is the root of all evil and the whole stimulus solution is like using MacDonalds as the cure for obesity.

Sorry SKC, i must have read your inital post wrong. While the o/s travel will be put on the credit card, I have the cash to pay it off within the 55 interest free days

Mitsimonsta · 7 April 2009

skc said:
I am definitely not advocating you to buy a TV... consumerism is the root of all evil and the whole stimulus solution is like using MacDonalds as the cure for obesity.

I love this post skc, absolutely true. Do you mind if I use it elsewhere?

My portfolio has dropped a little today (FXJ down as the retail SPP shares hit CHESS and people sell them off for 50% profit) but BEPPA is cushioning the fall nicely.

skc · 7 April 2009

Mitsimonsta said:
I love this post skc, absolutely true. Do you mind if I use it elsewhere?

Use it all you want, but if you ever get famous because of this I will come after you for my 8.5% royalty + GST.

Mitsimonsta · 7 April 2009

skc said:
Use it all you want, but if you ever get famous because of this I will come after you for my 8.5% royalty + GST.

Cheers. It certainly made me laugh.

Seems that BEPPA is on a slow march upwards. I really want my K-Rudd cheque right nao.

Viva_Las_Vegas · 7 April 2009

Topped up some BEPPA at 8.7c today. The negative day surely did not see them suffer price wise. They seem to be climbing.. slow and steady wins the race.

There also seems to be someone wanting to offload about 1 million BEPPA at 9c.

Profit taking? OR Loss on confidence?

Althought I have decided to hold BBI/BEPPA I have a question for those in the know....

There has been a lot of discussion about BBI and the strong value of its essential infrastructure assets which will be sold to cover debt. Banksa you have done hundreds of hours of research into BBI and have invested substantially.
Now despite our optimism in the survival of BBI and the positives pointed out by Banksa I count us as the few investors in a sea of many. So my main question is, WHY haven't analysts, insto's etc identified BBI/BEPPA as a solid risk/reward investment? Surely they have people working on these things looking for opportunities to make big money. And lets face it there is big money to be made here. So why hasn't BBI popped up on their radar with the sale process of DBCT in motion? I find this strange.

nulla nulla · 7 April 2009

skc said:
What I meant was, because you have other debt (e.g. travel), your $900 could have gone towards paying that off. So what you have effectively done is using debt to fund the purchase. Think about it as paying $900 to reduce the debt, then draw on it again to fund the purchase of the shares. Financially that's the same.

I am definitely not advocating you to buy a TV... consumerism is the root of all evil and the whole stimulus solution is like using MacDonalds as the cure for obesity.

I prefer the analagy from the Vietnam conflict era, "Fighting for Peace, is like F@&$ing for Chastity".

fuzzie · 7 April 2009

Viva_Las_Vegas said:
So my main question is, WHY haven't analysts, insto's etc identified BBI/BEPPA as a solid risk/reward investment? Surely they have people working on these things looking for opportunities to make big money.

Is this true? The analysis from my online broker has had BBI as a buy for a long time with a target of 30 cents, but with the caveat it's not for investors without a high tolerance for risk.

Their consensus view from 9 brokers has an average recommendation as buy, with no sells and only 1 under perform.

hardyakka · 7 April 2009

Viva_Las_Vegas said:
WHY haven't analysts, insto's etc identified BBI/BEPPA as a solid risk/reward investment? Surely they have people working on these things looking for opportunities to make big money. And lets face it there is big money to be made here. So why hasn't BBI popped up on their radar with the sale process of DBCT in motion? I find this strange.

I will try and add a few points which may answer your question:

a) If you look back at some old investment reports you will see that heaps of so called professional analysts had BBI as a buy above $1.

b) Instos. are restricted as to the type of securities they can buy with a small allocation to opportunist/spec. These asset allocation criteria are normally PDS or investment mandate restrictions.

c) Instos as investors do not like to buy when a stock is still regarded as spec, generally they like to see reasonable certainty of upward movement before piling in (ie post DBCT sale IMO).

d) Analysts have the same access to information that you and I do (in theory), ie data in the public domain. Its the navel and crystal ball gazing that separates them from the rest of us.

e) Dont forget it is not that long ago that brokers issued buy and sell recommendations to generate transactions and hence fee income, whilst they took opposite house views. That is one reason ASIC issued RG 181-Conflicts of interest & separate guidelines for research report writers.

Trust your own instincts and research.

Cheers

Viva_Las_Vegas · 8 April 2009

Understood. I too saw recommendations back in Oct Nov Dec to buy BBI, but haven't seen one in a long time.
As you say analysts etc have access to the same information as we do in the public domain, however how is it that a small pool of forum folk can be interested in this potential golden goose whilst the vast pool of investors is missing it?
Hardyakka, your explanation is great, I just can't get my head around this gem being missed by the rest of the market. I find this particularly strange.

Bolivia · 8 April 2009

Just wondering whether anyone can clear up a concern I have WRT the valuations being talked about for the DBCT.

Please correct me if I am wrong with the following numbers:

When BBI originally announced the sale of 50% of Powerco, This gave an Enterprise value of NZ$2.05 Billion, this meant that an EV/EBITDA basis it was sold for approx 9.3 times. The later adjustment to 58% meant the end figure was even less. Approx 9 times.

I was going through the investment pack and found that EBITDA for DBCT for the 6 months to end Dec08 was approx 70.1 Mill. It is my understanding that the Phase 1 upgrade was completed in March 08, so for the entire period to Dec08 it was operating on 68 mill tonnes. The first part of Phase 2/3 was completed in Dec08 taking the facilities tonnage to 72 Mill. Phase 2/3 will be completed, according to BBI, by June09 which will take tonnage to 85Mill.

Now, I know there is not a direct linear correlation between EBITDA and tonnes, but according to my caculations, if in the 2nd Half of FY09 tonnage is running at 72 Mill then EBITDA for the second half will be approx 6% more than the first half - $74.25Mill. Therefore EBITDA for FY2009 will be approx $144-145 Mill.

What I would like to know is how does one get to a valuation of anywhere near $3 Bill if EBITDA is approx $145 Mill? That implies a multiple of 20 times. Double that of Powerco.

Lets assume that we use the figures for the expanded capacity i.e 85Million tonnes. Back of the envelope calculations would mean EBITDA of approx $175 Mill. Still way short of the $226Mill Banksa Bystrica is using?

I am not trying to put any doubt out there, I am just simply trying to clarify the value picture for DBCT, and if it really is achievable to get that price.

nomore4s · 8 April 2009

Viva_Las_Vegas said:
Hardyakka, your explanation is great, I just can't get my head around this gem being missed by the rest of the market. I find this particularly strange.

Because maybe some of the posters here are wrong? But this is what makes the market - differing opinions, which is why you will get undervalued shares. The market atm is very savage on anything with excessive debt or anything deemed high risk but the shares that survive and manage the debt will eventually be re-priced by the market.

Bolivia said:
I am not trying to put any doubt out there, I am just simply trying to clarify the value picture for DBCT, and if it really is achievable to get that price.

The market would seem to think that it isn't achievable.

skc · 8 April 2009

Bolivia said:
Just wondering whether anyone can clear up a concern I have WRT the valuations being talked about for the DBCT.

Please correct me if I am wrong with the following numbers:

When BBI originally announced the sale of 50% of Powerco, This gave an Enterprise value of NZ$2.05 Billion, this meant that an EV/EBITDA basis it was sold for approx 9.3 times. The later adjustment to 58% meant the end figure was even less. Approx 9 times.

I was going through the investment pack and found that EBITDA for DBCT for the 6 months to end Dec08 was approx 70.1 Mill. It is my understanding that the Phase 1 upgrade was completed in March 08, so for the entire period to Dec08 it was operating on 68 mill tonnes. The first part of Phase 2/3 was completed in Dec08 taking the facilities tonnage to 72 Mill. Phase 2/3 will be completed, according to BBI, by June09 which will take tonnage to 85Mill.

Now, I know there is not a direct linear correlation between EBITDA and tonnes, but according to my caculations, if in the 2nd Half of FY09 tonnage is running at 72 Mill then EBITDA for the second half will be approx 6% more than the first half - $74.25Mill. Therefore EBITDA for FY2009 will be approx $144-145 Mill.

What I would like to know is how does one get to a valuation of anywhere near $3 Bill if EBITDA is approx $145 Mill? That implies a multiple of 20 times. Double that of Powerco.

Lets assume that we use the figures for the expanded capacity i.e 85Million tonnes. Back of the envelope calculations would mean EBITDA of approx $175 Mill. Still way short of the $226Mill Banksa Bystrica is using?

I am not trying to put any doubt out there, I am just simply trying to clarify the value picture for DBCT, and if it really is achievable to get that price.

Power companies and ports should have fairly different multiples, given their different business risk etc. See here on the 2005 BBI purchase of PD ports. The price paid was 12.6 times next year's EBITDA. It also contained some industry comparables. Note the multiples for Patrick (now AIO) is definitely not quite where they used to be in 2005.

Also note, the DCBT is a 50 year asset (how many year is left?), so check for yourself about PD ports. Clearly the multiple you pay for the income over next 50 years will be slightly different to if you own something outright forever.

http://www.bbinfrastructure.com.au/media/86595/121205 bbi presentation - pd ports.pdf

On your EBITDA number. I think the buyer will look for the EBITDA operating at the fully expanded capacity. Also, there will be signficant fixed costs in a port, so you are right that EBITDA will not be totally linear with capacity. You will need to work back base on BBI's numbers, but you will be surprised by how much of the increased capacity could potentially drop straight into EBITDA.

E.g. on purely made up numbers...

On 70m tonnes, revenue = $1000m, fixed costs = $200m, variable costs = $700m (or $10/tonne). EBITDA = $100m

On 85 tonnes, revenue = $1215m, fixed costs = $200m, variable costs = $850m (same $10/tonne). EBITDA = $165m.

So a 20% increase in capacity has led to 65% increase in EBITDA.

banska bystrica · 8 April 2009

When buying an asset like a coal terminal that is not operating at full capacity, one must do the numbers on full capacity figures because we know DBCT could easily process double the number of ships it is doing now if the capacity was there.
I have full confidence in my EBITDA numbers on FULL capacity.

ABN are forecasting 2011 EBITDA at $241M. I think that might be conservative but even if we take that figure and apply a 12.5X EBITDA multiple we get $3B.
If we conservatively use the 2010 figure of $224M, we get $2.8Bn.
If AIO are expecting 12.5X, then DBCT will get this in a flash. It's income is fully regulated.
I would be disappointed in anything less than $2.7Bn.

The MCG takeover at $2.50 is pcing in EBITDA of 15+. The world is waking up, the penny is dropping. Infrastructure assets will outperform once inflation kicks in around 2011.

banska bystrica · 8 April 2009

nomore4s said:
Because maybe some of the posters here are wrong?

Spot on. Maybe we are wrong in which case we will get slaughtered.
However, if we are correct and the market is wrong, we will make a fortune.

banska bystrica · 8 April 2009

Viva_Las_Vegas said:
I just can't get my head around this gem being missed by the rest of the market. I find this particularly strange.

There are plenty of people buying BBI other than forum readers. Look at the volumes going through the last month. I can assure you it's not just forum users. Instos will only start buying when the risk is gone. That's why I believe the sale of DBCT will be the catalyst for BBI to be re-rated substantially in the following quarter after the sale of DBCT.

BBI - Babcock & Brown Infrastructure

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