Babcock & Brown Infrastructure Group - Logic prevails on distributions, scepticism likely to remain though
Last Traded: $0.14 Market Cap: $451 Sector: Utilities
Summary of report dated 6/11/08
BUY / OUT PERFORM Valuation: $1.34
Summary
BBI has suspended distributions indefinitely to reduce leverage. BBI says this is not due to any poor operational or financial performance of the assets.
Disclosure however remains problematic. In addition to management agreements, disclosure of asset level ICRs is necessary to address investor scepticism that the suspension of distributions is due to underperformance from some of the assets.
Sale of Powerco demonstrated that there is significant value within the suite of BBI assets. Having said that, executing on asset sales is difficult as demonstrated by the low offers received for BBI's stake in Multinet Gas. The remaining asset sales remain on track. If a sale of 50% of WNR and Euroports is conducted BBI's interest cover ration (ICR) will move to 1.81X, still short of the medium term target of 2.0X.
While we thought Powerco would be a difficult sale to execute on (due to regulatory uncertainty), the sale of Westnet Rail and Euroports with volumes under pressure will also be difficult.
Valuation remains significantly above the security price on any reasonable metric. Our DCF valuation remains $1.34/share. The BBI share register is likely to experience a Transurban (TCL) type adjustment with retail investors having little reason to own the stock without a yield. This is why disclosure is even more crucial for a recovery in BBI's security price as it needs to attract institutional investors to the register.
We expect BBI to reinstate the distribution in FY10 at 10cps in line with our net operating cash flow forecasts (EBITDA less interest less tax less maintenance capex).
Recommendation remains Buy / Out Perform.