This is a post from a friend on another forum. Probably not the one you are thinking of, but certainly knows his stuff.
----------- Having been through the BBI financials in detail the following summary is my view of BBI. There are more positives than negatives very simply because that is my interpretation of the numbers.
Current Environment As we all know times are tough. There is recession, business and consumer spending (especially discretionary spending) is down (offset a little by government stimulus packages), the AUD is low, interest rates are at record lows, cash is king and businesses are going to the wall left right and centre (due either to gearing or lack of product demand). This will be the situation at least for another one to two years.
Future Environment Once we move out of the current negative environment debt availability will increase along with demand as business and consumer confidence grows. This will stimulate the demand for goods and services, especially resources. I would expect this to strengthen the Australian dollar and give rise to interest rate increases to curb inflation.
BBI Financials-Negatives -Whilst cash flow positive the margin of operating cashflow at the moment is on a knife edge. This has been exacerbated by the 200bps increase in the cost of corporate debt. -Contingent liability to the ATO of $143M. BBI is confident of a win, however a degree of risk exists. -The obvious, the level of debt and associated costs, one comforting factor is the majority being asset specific only. -Repayment of SPARCS, this is a short term cashflow issue only. BBI must address this so they are not screwed at the last minute as they were with the PowerCo sale. The financials specify that they expect to repay these from operating cashflows so dilution of equity will not occur. -Interest rate swap charge, this is both a positive and negative. The IFRS MTM of the cost of swaps, whilst a none-cash item, is material. However when you consider the positive aspects of the charge it is not material.
BBI Financials-Positives -In these markets the diversified nature of the primarily regulated revenue streams have held ground or improved (except for PD Ports and Euroports which are marginally down). This reaffirms the defensive nature of the assets. In a more normal market these would improve as confidence returns. -Sale processes at various stages to release funds to reduce debt. My personal view here is that at least 50% of DBCT should be retained. -FX and interest rate swaps, the IFRS charge represents the full MTM at balance date. However when you consider in the future environment interest rates will trend upward as economies recover then the amounts actually realised over future years will be much less. -Unqualified audit report, it is simply another indicative factor on the overall health of BBI. -I am always very careful of Goodwill charges and am pleased to see the asset virtually halve as it relates to discontinued operations. -Asset values, no impairment charges in the worst possible market from what some naively consider is a distressed vendor. -Unsolicited approaches by third parties seeking an interest in the assets. This simply reaffirms the quality of the assets and magnitude of $, especially with regulated income, seeking an equity home. Gives a brief explanation of the competition Australian funds face for quality infrastructure assets.
-NTA, note that these numbers are after recognising the full liability for the SPARCS and BEPPA. The BBI price is a factor of about 15X the current unit price. Quality geared REITS run at a factor of about 2X, so the BBI price should be about 7 times what it is now. -Most importantly of all, management. There is a quality team running BBI. Without good management it does not matter how good your assets or business is, you will be stuffed.
Priority Issues Increase operating cashflow & reduce debt. IMO a 50% sale of DBCT and a few other assets will significantly achieve this. Thus bringing BBI back into the quality investment arena.
Conclusion IMO these financials will be the worst that will be issued by BBI and there is nothing unexpected. I consider overall BBI is on the recovery path and the price on a definitive upward trend with the first major impact of the unit price to be when there is certainty about DBCT disposal.
I hold a significant number of BEPPAs and will now be building a BBI stake.
Note that the above is what the guy in the pub told me a mate of his overheard in another pub, so it might be an idea to complete your own analysis and formulate your view accordingly.
Cheers
BBI Price at posting:
6.5¢ Sentiment: LT Buy Disclosure: Held
