Opinions
Steven Ko
Brookfield Business Partners LP
BBU.UN-T
STRONG BUY
Nov 30, 2018
Stock price when the opinion was issued
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BBU.UN's Adjusted 2022 EBITDA increased by 3% to a record $2.3 billion and Adjusted Free Cash Flow increased to a record $3.40 per unit.
EBITDA across operating segments including Business Services, Infrastructure, and Industrials improved compared to 2021.
BBU.UN is now trading at 8x times annualized EBITDA.
Weaker capital markets are a possible short-term headwind for the company, as it is harder for the company to recycle capital into new deals.
BBU has been repurchasing shares over the last twelve months, indicating management believes shares are undervalued. The balance sheet is quite leveraged, with total borrowings of $15.1B.
Total debt is around 6.5x times the trailing twelve-month EBITDA of $2.3B. Based on consensus estimates, BBU.UN business performance is expected to improve in the near future as capital market conditions improve.
Overall, we think these prices offer an attractive entry point for BBU.UN, provided that investors are comfortable with the leveraged balance sheet.
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We note BBU has been (highly) cash flow positive for the past four years, and as noted book value is much higher than the current price. It is 'only' down 15% this year, and many have fared much worse. Its debt level ($44B net) no doubt scares off investors but it has assets ($89B) backing this up. It is still paying its distribution (1.7% yield). There has been a little bit of insider buying. We are probably getting close to the level where BN (owning 37%) is likely looking at it to take it private, considering the long term prospects more so than investors only looking at high rates and a possible recession right now. It could be a value trap, but Brookfield entities tend to be pro-active when times are bad: it might just go on a buying spree. It needs to be considered higher risk, certainly. Its interest expenses are very high, and not likely to decline for a while. But, we agree it is getting interesting for higher risk investors who have a decent time frame to hold. We do not think there is short term default risk here, assuming some assets can still be sold if conditions worsen.
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Own BN, because it's the mothership; everything flows to them. BN has been under pressure for owning office real estate, which is very undervalued and will take time to resolve. They own a big stake in BAM, which is the gem in this lot, because BAM collects healthy fees which flow to BN. BBU doesn't enjoy this.
A way to participate in Brookfield's excellent track record of private-equity investments. Owns companies like the largest residential mortgage insurer in Canada, and one producing low-voltage automotive batteries globally. Big discount of ~30% to NAV. Yield is 1%.
(Analysts’ price target is $45.46)