Babcock & Brown Infrastructure (BBI) Update

Submitted by Jim Thesiger on 16 June, 2008 - 19:33

Babcock & Brown Infrastructure (BBI) has a target price of $1.35 from Australian Stockmarket analyst Macquarie Research Equities.

Babcock & Brown Infrastructure (BBI) B&B pressure could be a positive for BBI

B&B & retail selling pressure:

We understand that ~70% of BBI's register is held by B&B, "friends" of B&B, and retail investors. With the decline in market value of the B&B stable, this is likely to result in selling pressure caused by margin calls. Also, B&B debt review may result in B&B being forced to sell its 8% stake in BBI (held through Deutsche). BBI reiterated that there are no market capitalisation related debt covenants.

Triggers for removal of B&B as manager of B&B include::

1) B&B negligence; 2) B&B insolvency; 3) B&B de-listing on ASX; & 4) B&B stake in RE falls below 70%. All of these trigger an option for independent directors to remove B&B as manager of the fund. Also, despite a 25 year management agreement in place, BBI management stress that security-holders have the option to remove B&B as manager by a simple majority vote. The PDS is unclear, however we think it is likely that ASIC (and independent directors) would look unfavourably at any requirement to pay out 25 years of management fees!

Value uplift of 30cps through removal of manager:

Under both scenarios identified above, BBI would be required to pay a max. of 25% of one year of base management fees (~$5m at current prices) and any outstanding performance fees ($7m for FY05 performance fee outstanding). We discount our BBI valuation by ~$684m for future management fees (~30cps).

Valuation: $1.57 (spot DCF); price target $1.35 (12-month DCF less 20%)

Our PT of $1.35 is our 12-month DCF less a 20% investment trust/qualitative discount. We see better value elsewhere in the sector on a risk/return basis.