Babcock & Brown Power

Babcock & Brown (BNB) has a $25.00 share price target from Australian stockmarket analysts from Citi.

Babcock & Brown (BNB) Reputation damage

BBP refinancing shortfall and "mis-communication":

Babcock & Brown Power (BBP) have raised its FY08 guidance by 9% to 26.1cps from 24cps in conjunction with today's Alinta Scheme Booklet (SB) release. While Australian stockmarket analysts Citi Investment Research maintain a view that Babcock & Brown Power has paid a full price for the AAN assets, they still believe the medium to long-term prospects for the company remain very positive and re-iterate a Buy/Medium Risk recommendation. While there will be criticism of the 'financially engineered' nature of the AAN deal's DPU accretion, it is worth noting that BBP's FY08 DPU assumptions in the PDS included a DRP contribution. The increased DRP assumed post AAN simply relates to the increased securities on issue. The DRP is in place to offset the cash outflow associated with maintenance reserving. Babcock & Brown Power (BBP) has indicated that it expects synergies of some $14m from the deal , this is above CIR estimate of $10m. Management expects about 40% of this figure to be achieved in FY08, which will be largely offset by one-off restructuring costs of $4m. The analysts expect management to set a price for its 67% of AlintaAGL shortly after the scheme is declared effective in mid-August. AGL then has 3 months in which to decide whether or not to buy that 67% or sell its 33% stake to Babcock & Brown Power (BBP) at an equivalent implied price. Despite the view that BBP has paid a full price for the AAN assets, the analysts remain firmly of the view that the outlook for the business as a whole is positive. Furthermore, there could be upside to today's AAN numbers through Bairnsdale and Bell Bay, for instance. Their forecasts and valuation remain unchanged pending their digestion of the 648-page Scheme Booklet.

Babcock & Brown Power (BBP) has a maintained Buy, Medium Risk broker call and an upgraded share price target of $3.90 from Australian stock exchange analyst Citi Investment Research. They now view the likelihood of power prices in SA falling below the Osborne contract level as very small. As a result, the analysts are removing the remaining $70m of liability they ascribe to the provision. This change leads to a 30 cents per share (cps) share increase in their target price to $3.90. While the current level of power prices is undoubtedly water driven, they firmly believe that the market’s tightening supply/demand balance will keep prices well above the $30-$35/MWh range of recent years. On their estimates, the current share price is factoring in a $55/MWh long-run price: at $60/MWh, BBP would be worth about $4.50. A clear point to emerge from Babcock & Brown Power's (BBP) presentation at the Citi Infrastructure and Utilities Conference yesterday was the option value embedded in retrofitting its open-cycle gas peakers. The emergence of certainty around the structure of a carbon market should serve to embed the value of converting OCGT to baseload combined-cycle (CCGT). According to comments made by Babcock & Brown Power's (BBP) CEO at yesterday's conference, the Alinta transaction is progressing as expected, with the Scheme of Arrangement hearing expected at some point in August. Successful conclusion of the AAN acquisition would roughly double the size of Babcock & Brown Power (BBP). A fall in forward prices from current levels, which the analysts expect, would likely exert downward pressure on sentiment and the share price. However, they believe that the long-term drivers for appreciation in Babcock & Brown Power (BBP) remain firmly intact, thus their recommendation remains Buy/Medium Risk.