BNB - Babcock & Brown

[roland]

We might need to wait a week. The report comes out tommorow...
I am really dreading this.. I hate this stock...

Know how you feel VViCKiD, I got all excited with BNB when I picked up some at a low and made some good profits on the highs. I gave up a few dollars ago, and decided to get into the peripherals such as BBW and BBP. The dividend yield is a whole lot better if you get stuck and have to hold. BNB really ties up a lot capital with close to no dividend yield.

There is nothing wrong with BNB, they are a great company and you will do well if you are patient. I'm not so patient - so got burnt

 

[reece55]

I'm going to B&B report to cover this tomorrow.

Anyone have any particular questions? I'll be happy to ask lol, I personally want a comment from them after investor confidence in their business model has been shot down. I think SGB and CMC cut margins to BNB and the stock has been the most smashed after Alllco and MFS.

You know its funny, I called MFS, BNB, AFG and MQG up at work and asked them if they want to participate in naming their weekly hires for a weekly story.

MFS BNB AFG refused to participate and they are pretty horrible with dealing with the media and rather secretive, so I dare say these companies are not transparent.

MQG on the other hand is great with the media and stock has fared better and they participate in our "name who ya hired" section.

Vishalt
Just because MQG has a great hand on the media does not mean they are more transparent....

BNB is much better disclosure wise than MQG ever have been (certainly from an accounting view)....... MQG just have a nice bankroll to fund a media campaign to let everyone know everything is ok....

Plus, MQG does have the advantage of having a funds management and broker arm, which arguably are less cyclical than BNB's strictly investment banking business...

Cheers

 

[L plates]

I'm dreading tomorrow. How far will it tank? God only knows, 10 - 20% ?
What the hell might as well go a good 50%.

I regret the day I ever purchased this damn @#@&*^& %%$#@ #$# 'ing stock


Makes me so mad

 

[prana]

Results ! NPAT to members +70% to BNB 58% ROE 32.4% div 33cents from 21cents

Outlook for 2008 growth is around 15%

 

[thierry]

great results.. they've got enough cash to ride out credit woes.. and could actually make the most of everyone else's credit woes.

hope the sp performs as good as the result

 

[barnz2k]

Results ! NPAT to members +70% to BNB 58% ROE 32.4% div 33cents from 21cents

Outlook for 2008 growth is around 15%

If this isn't enough of a reason to stop those F****rs from hammering the price down i dont know what is. This stock is solid let it get back up there!!

 

[Nicks]

Vishalt
Just because MQG has a great hand on the media does not mean they are more transparent....

BNB is much better disclosure wise than MQG ever have been (certainly from an accounting view)....... MQG just have a nice bankroll to fund a media campaign to let everyone know everything is ok....

Plus, MQG does have the advantage of having a funds management and broker arm, which arguably are less cyclical than BNB's strictly investment banking business...

Cheers

Agree Reece. It has been consistently noted that BNB do not 'fund' increases in profit, assets or dividends through asset revaluations, nor do they loan against them. Maquarie do. To me this is dangerous and even more compounded in a volatile market with tight credit.

Stranegly BNB are not the ones holding up. Eventually fundamentals and reality need to kick in and I think you will see some significant positive reratings of this stock, meanwhile Maquarie can't keep its risky business af profiting from revaluations and intangibles going and could get hurt severely.

This makes BNB my stock of choice. No riskiness, no 'revaluations' to increase book figures, no loans against revaluations. Just solid investment business. Investment in 'tangibles'. At this price all the fear mongers are doing us a favour.

Time will show.

 

[michael_selway]

Results ! NPAT to members +70% to BNB 58% ROE 32.4% div 33cents from 21cents

Outlook for 2008 growth is around 15%

Wow they beat 2007 forecasts by a bit, but 15% forecast appears to be lower than previusly forecasted etc

EPS(c) PE Growth
Year Ending 30-12-07 166.6 9.2 44.4%
Year Ending 30-12-08 197.7 7.8 18.7%

Earnings and Dividends Forecast (cents per share)
2006 2007 2008 2009
EPS 115.4 166.6 197.7 224.9
DPS 36.0 52.4 59.8 70.0

thx

MS

Date: 18/2/2008
Author: Matthew Cranston
Source: The Australian Financial Review --- Page: 55
Three cattle stations in Australia that are among the nation's best andbiggest are on the market. "Wollogorang Station" in the NorthernTerritory is expected to be sold for in excess of $A50m, with investment bankBabcock & Brown a possible investor. The property of 705,700ha, with roomfor some 50,000 head of cattle, also has great tourism development potential.The "Scheelite" breeding and fattening facility on King Island in BassStrait is being divested by Oakey Holdings, a subsidiary of Nippon Meat PackersAustralia, for $A18m. Finally, a cluster of beef cattle properties in SouthAustralia known as "Sheraco Group" is likely to fetch $A20m

 

[Mr_T]

Wow they beat 2007 forecasts by a bit, but 15% forecast appears to be lower than previusly forecasted etc


MS

Yeah, but they have always exceeded their forecast. By memory, wasn't their forecast at the beginning of 2007 for a 20% rise during 2007? This was upgraded over the course of 2007.

 

[vishalt]

They smashed estimates.

I was in during the conference call and geez you talk about "media grilling the board" - well Phil Green hits back and totally redfaces the journos. He's pretty passionate about the business and its clearly believable in as stated in the report that people are selling the stock indiscriminately.

 

[reece55]

They smashed estimates.

I was in during the conference call and geez you talk about "media grilling the board" - well Phil Green hits back and totally redfaces the journos. He's pretty passionate about the business and its clearly believable in as stated in the report that people are selling the stock indiscriminately.

Yep, good ole Phil Green is a magnificent leader, but I think the best thing if you actually listen to his teleconferences is the down to earth way he relays the results of the business. No matter what your understanding of corporate finance, he explains it extremely well.

Plus, as you say Vishalt, he loves stirring up the media..... I haven't listened to the results briefing, but in the half year he told them he was surprised that anyone was still interested in the business in light of the way people were selling his stock.....

Cheers

 

[thierry]

BnB have presented some great results and shown a low level of debt which is what the market wanted.. going at lenght to distance themselves from afg would have also helped the stock get back in favour. Hopefully it does get back into favour over the next few days and the market starts valuing it at what it is really worth. up another 6% today.. still a long way to go imo.

 

[VViCKiD]

I'm in at $19... so still copping a punishment.... I hope this one goes all the way back up to $30... hehehehehe it was at highs of 30+ just last year...
So praying for the best here...

 

[Mr_T]

According to this Crikey article (available to Crikey subscribers only) Babcock DO revalue assets and add this to their profit. Also, they seem to do so in dubious circumstances.

Here it is:

Friday, 22 February 2008

Michael Pascoe writes:


Beware the financial press falling over itself to heap praise on financial engineers – which is exactly what happened after yesterday’s Babcock and Brown results.


Phil Green was at obvious pains to distance his millionaire factory from the likes of Allco and MFS with a very rich set of numbers – a net profit of $643 million that meant a bonus pool for the lucky execs of more than half a billion dollars. Nice.

But different strokes for different folks. Rather than lapping up Phil’s damning of hedge funds, I was looking for his commentary on the US residential housing market crash, given that BNB plunged $1.6 billion or so on American flats and condos at the top of the market.

I naively thought there might have been a little write-down in the present circumstances, or at least a careful warning about what might be ahead. After all, there was that little Business Week cover story last month suggesting US residential property could fall by up to 25 per cent – and then it would only be back to its long-term trend.

No such write-down from BNB though – quite the opposite. That profit bottom line looked good, but $100 million came from the simple business of revaluing property upwards.

In the present climate, that’s an amazing achievement, especially as the aforementioned US residential stuff represents most of BNB’s real estate investments. But that thought doesn’t seem to have occurred to the cheer squad.

Babcock and Brown’s accounts show it started 2007 with $266 million worth of real estate held as investment property. It then proceeded to buy another $2.2 billion worth. It "deconsolidated" $739 million, pulled in another $11 million from "assets under development", threw in $10 million in capitalised expenditure and therefore had a portfolio of some $1.56 billion.

And then, with property prices falling hard and fast in the US and Europe, Babcock and Brown topped the portfolio up with a $100.6 million "net gain from fair value adjustments" – which means they decided it was suddenly worth $100 million more within months of being purchased.

Gee, they really must be real estate geniuses to achieve that sort of performance so very quickly in crashing markets. All hail BNB – and don’t think too much about the numbers.

 

[prana]

Pretty good volumes today, on the upside, it exchanged over 4M, that's not too bad. I dunno, perhaps I'm being naive but I pay no attention to the media. When all is good, you hear nothing, but when prices plunge, suddenly a barrage of -ve news appears after the fact, always playing hindsight and tag. What's the good in that?

You really have a choice in stocks, if you like it, you open a position. If you don't like it, you don't. How hard is this concept? And if you picked it up at $18, and it became a victim of short selling, then just let it be. If you believe the intrinsic value is high and you are comfortable with it, then so be it. If you bought a computer for $2k and suddenly you find some store liquidating it at $1.4k cause they're going out of business, do you suddenly drive yourself into the concrete wall over it? I can understand it if you're a trader, or a very greedy investor. But 20% downside in a market like this, is soft.

I think this thing has now completed a double bottom at the same levels, would be interesting to see if it's able to carry momentum to keep its head above these $14 levels with ongoing volatility.

 

[vishalt]

Here's the article I did, journalists who weren't there at the conference catch Phil Green's fury which are in some of the quotes below:

He literally froze cold any journalists who dared presume any bad debt/margin links.

Investment firm Babcock and Brown's (BNB) chief executive has defended his company's business model after returning a 58 per cent rise in profit to $643 million for 2007.

BNB chief executive Phil Green attributed the rise in profit to revenue generated from buying infrastructure assets and higher management fees.

When asked about its share price decline from a high of $34.78 set in July last year, to a recent low of $14.99, Green said investors did not understand the firm's business model.

"They [investors] do not believe that we do not trade in financial assets," he said.

"We are basically an industrial company.

"We develop wind farms, we invest in real estate, [and] we invest and manage aircraft."

Green also said he was angry with market speculation that BNB executives could face margin calls on their shares like their counterparts from Allco Finance Group (AFG).

"It is total nonsense and absolute rubbish," Green said.

The firm's senior executives have not geared their BNB shares and that they only received them when the firm listed, he said.

"They have not leveraged them, they have never leveraged them and that is the end of the story," Green said.

AFG's share price fell 26 per cent on 23 January after its employee investment vehicle, Allco Principals Investments, sold stock to cover margin calls from its lenders.

BNB declared a dividend of 54.4 cents and is forecasting 15 per cent rise in profit to $750 million for 2008.

BNB shares rose $1.43 or 9.33 per cent to close at $16.76 yesterday.

 

[Mr_T]

Regarding Michael Pascoe's article that I reproduced above:

I did some research and went looking through BNB's recent reports. What he says may in fact be correct. What he says about the revaluations IS correct - they did occur. What is in issue is whether the revaluations take account of current true value. If they don't then BNB's Profit has been over stated.

What I have written is after looking at their results. I am happy to be corrected on any errors:

REVALUATION OF ASSETS
On the Appendix 4E of their accounts for 2007, page 68, there is an item of Revenue (which adds to profit) listed as "Fair value movement on investment property" in the amount of $100,631,000.


WHAT HAS BEEN REVALUED?
What exactly does this refer to? Some clues as to what this is referring to appear in the following:

Page 2 of "Full Year Results 2007 Announcement" attributes part of the increase of the revenue in the Real Estate division to the following:

"an uplift arising from the development of an Asian self storage portfolio.......and an uplift in the value of the BNP Residential Property portfolio in North America."

The "Full Year 20007 Results Presentation" also refers to "uplift in value" of Asian self storage and BNP Property in the USA in a few places.

So the $100M in revalued assets (which has increased profit) is due to 2 things:
a) its Asian self storage portfolio; and
b) rise in value of American BNP property

HOW MUCH OF THIS REVALUATION IS DUE TO ASIAN SELF STORAGE AND HOW MUCH IS DUE TO THE AMERICAN BNP PROPERTY?
Nowhere is it explicitly stated how much of the $100m is due to the revaluation of the Asian self storage and how much is due to revaluing the BNP Property in the USA.


LETS EXAMINE THE REVALUED BNP PROPERTY A BIT MORE
Since the BNP Property in the USA is more worrying of the 2, lets focus on that one.

Page 21 of the "Full Year 20007 Results Presentation" refers to
"The revaluation of the BNP multi-family portfolio in the US as disclosed at the interim result."

Frankly, IMHO this comment raises some red flags. It bascially implies that the revaluation was done before mid year, and so does not take account of events of the second half of 2007.

Page 23 of "Full Year 20007 Results Presentation" justifies this higher value given to the BNP properties by stating the following:
"The total investment is currently valued in excess of $1.8bn and includes nearly $1.5bn of non-recourse, debt. We remain very comfortable with the valuation of this portfolio on our balance sheet for a number of reasons including:
• Occupancy rates across the portfolio are well in excess of 90% and they have continued to experience strong NOI growth of approximately 4%.
• We acquired older properties in the high growth Sunbelt states. Our average price per unit for both deals is well below replacement cost for newly constructed comparable units.
• We financed our purchase primarily with 10yr fixed rate debt with a weighted average coupon of 5.65%. This debt is interest only and assumable.
• On December 21, 2007, we closed a sale on two properties from our Alliance portfolio at a cap rate of 5.43% based on in-place trailing 12 months NOI. We believe the assets in the BNP portfolio, which are on the balance sheet at an approximate 5.75% cap rate, are superior to the assets sold. At the end of the period Babcock & Brown’s direct and indirect equity in the portfolio was $136m."


NOT GOOD ENOUGH
Not good enough BNB! If you are going to revalue property in a falling market (as is the case of the American BNP property) you really need to give more detail than you have.

I find this troubling and I want to find out more. Any suggestions how/where I can do so?

 

[reece55]

Regarding Michael Pascoe's article that I reproduced above:

I did some research and went looking through BNB's recent reports. What he says may in fact be correct. What he says about the revaluations IS correct - they did occur. What is in issue is whether the revaluations take account of current true value. If they don't then BNB's Profit has been over stated.

What I have written is after looking at their results. I am happy to be corrected on any errors:

REVALUATION OF ASSETS
On the Appendix 4E of their accounts for 2007, page 68, there is an item of Revenue (which adds to profit) listed as "Fair value movement on investment property" in the amount of $100,631,000.


WHAT HAS BEEN REVALUED?
What exactly does this refer to? Some clues as to what this is referring to appear in the following:

Page 2 of "Full Year Results 2007 Announcement" attributes part of the increase of the revenue in the Real Estate division to the following:

"an uplift arising from the development of an Asian self storage portfolio.......and an uplift in the value of the BNP Residential Property portfolio in North America."

The "Full Year 20007 Results Presentation" also refers to "uplift in value" of Asian self storage and BNP Property in the USA in a few places.

So the $100M in revalued assets (which has increased profit) is due to 2 things:
a) its Asian self storage portfolio; and
b) rise in value of American BNP property

HOW MUCH OF THIS REVALUATION IS DUE TO ASIAN SELF STORAGE AND HOW MUCH IS DUE TO THE AMERICAN BNP PROPERTY?
Nowhere is it explicitly stated how much of the $100m is due to the revaluation of the Asian self storage and how much is due to revaluing the BNP Property in the USA.


LETS EXAMINE THE REVALUED BNP PROPERTY A BIT MORE
Since the BNP Property in the USA is more worrying of the 2, lets focus on that one.

Page 21 of the "Full Year 20007 Results Presentation" refers to
"The revaluation of the BNP multi-family portfolio in the US as disclosed at the interim result."

Frankly, IMHO this comment raises some red flags. It bascially implies that the revaluation was done before mid year, and so does not take account of events of the second half of 2007.

Page 23 of "Full Year 20007 Results Presentation" justifies this higher value given to the BNP properties by stating the following:
"The total investment is currently valued in excess of $1.8bn and includes nearly $1.5bn of non-recourse, debt. We remain very comfortable with the valuation of this portfolio on our balance sheet for a number of reasons including:
• Occupancy rates across the portfolio are well in excess of 90% and they have continued to experience strong NOI growth of approximately 4%.
• We acquired older properties in the high growth Sunbelt states. Our average price per unit for both deals is well below replacement cost for newly constructed comparable units.
• We financed our purchase primarily with 10yr fixed rate debt with a weighted average coupon of 5.65%. This debt is interest only and assumable.
• On December 21, 2007, we closed a sale on two properties from our Alliance portfolio at a cap rate of 5.43% based on in-place trailing 12 months NOI. We believe the assets in the BNP portfolio, which are on the balance sheet at an approximate 5.75% cap rate, are superior to the assets sold. At the end of the period Babcock & Brown’s direct and indirect equity in the portfolio was $136m."


NOT GOOD ENOUGH
Not good enough BNB! If you are going to revalue property in a falling market (as is the case of the American BNP property) you really need to give more detail than you have.

I find this troubling and I want to find out more. Any suggestions how/where I can do so?

Mr. T
With all due respect, the results announced are Appendix 4E style and as such, do not require the same level of disclosure as a full annual report in accordance with Corporations Act. I suspect the answer will come by either emailing their investor relations department if you are a shareholder or waiting for the full statutory accounts (due at the latest by 31 March 08).

Bare in mind that if you add something like this back (and I certainly do when I am valuing the Company), the effect on the bottom line would be about 70 Mil due to the tax effect. Granted, that's a big move, but even with an add back like that the result in my view is fairly robust. I still think that revaluations of investment properties should be taken to a reserve until realised, but good ole AASB 140 'Investment Properties' says otherwise. Note that this is the only item of PP&E that you can take through the P&L, the investment banks fought hard for that to be inserted into our Australian framework.

I'm glad that people are starting to read the financials of Companies again however, it's about time people started questioning the crap we accountants have been feeding the market in the last 3 years!

Cheers

 

[reece55]

Looking through the 4E again, I am a little more concerned about that valuation now.......

Have a look on page 79 in the notes section - the large majority of the valuation is at Director's valuation (like 1.3 Bil!!!!)....... ughhhhh god I hate that word in financials.... I will be looking closely at the statutory accounts to see how they determined the "directors valuation"....

Cheers

 

[Mr_T]

Recee55: Just how concerned how you?

Do you take the view that if BNB have been "economical with the truth" on this issue, it raises a whole lot of other questions?