Babcock & Brown (BNB) Technical Update

Submitted by Jim Thesiger on 2 June, 2008 - 22:32

Babcock & Brown (BNB) has a target price of $25.00 from Australian Stockmarket analyst Macquarie Research Equities.

Babcock & Brown (BNB) Now it's time to walk the walk

AGM reaffirms EPS growth target of 15%:

BNB's AGM today reaffirmed its NPAT target of $750m representing c15% EPSg. This is based on (1) locked in growth in base fees from growing funds (2) A very strong development pipeline in wind, power transmission, PPP projects and resi developments (3) $5b in unutilised capital in its specialist funds (4) deals done YTD (5) guidance includes an allowance for RE write-downs & realised losses. Infrastructure will be the driver of this growth, generating 60-65% of net revenue.

A weaker 1H08 with growth coming through in 2H08:

1H08 earnings are likely to be weaker (flat to down on pcp). This is driven by the timing of write-downs and provisions, higher expected tax rate (more US earnings) and FX impact. 2H08 is seasonally stronger and should be boosted by timing of wind farm sales. Deal slippage remains a key risk.

Eating humble pie. Now it's time to act:

BNB has suffered significant reputation damage given the poor performance of its funds and their failure to deliver on targets. This was acknowledged by BNB stating it needs to regain investor's "trust & confidence". We believe this is critical to BNB unlocking shareholder value (close, degear or restructure its funds).

Valuation - Maintain Buy and $25 PT (SOTP based)

We think BNB is cheap at 5.4x (FY09E). The business is performing well and it continues to deliver on financial targets. However, we believe the stock will not re-rate until it can restructure its key funds (BBI, BBP, BBW) and demonstrate that it can deliver financial returns for investors in its vehicles. Hard decisions need to be taken.

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