Macquarie: BBI - Plenty Of Reasons To Smile 13/07/05
Babcock and Brown Infrastructure's (BBI), formerly known as Prime Infrastructure (PIF), is due to report their full-year result on 6 September. Macquarie believe that BBI represents attractive value due to the strong growth and high dividend yield outlook for 2006. In the following report Macquarie preview BBI’s FY05 result and examine the FY06 outlook.
Complicated FY05 result expected but cashflow should be fine. BBI has executed two major acquisitions during FY05, being Powerco with eight months' contribution and International Energy Group with one month's contribution. Macquarie expect a number of unpredictable accounting adjustments and charges in relation to both these assets leaving the headline FY05 net profit after tax (NPAT) largely irrelevant. Macquarie estimate the underlying FY05 NPAT to be around $25.8m. The integration of both major acquisitions has proceeded smoothly.
More acquisitions expected in near term. The key BBI security price driver is the execution of further yield accretive acquisition opportunities. Short term acquisition prospects may be available in the electricity and gas distribution markets of New Zealand with Powerco utilising IEG's footprint in the UK market. The parent of BBI, Babcock and Brown (BNB), also owns a 7.6% stake in Gasnet. Macquarie don't believe BNB will remain a passive Gasnet shareholder. Organic growth is also an option through the expansions of Dalrymple Bay and the construction profile of Global Wind Partners (GWP).
Upward distribution trajectory. FY06 is shaping up to be BBI's best to date with distribution guidance of at least 12cps. This target is based on full year cashflows from Powerco, IEG and the 50% owned Lake Bonney wind farm. Macquarie estimate that FY06 net cashflow per share (after maintenance capital expenditure) could be closer to 15cps and have set our FY06 distribution forecast at 14cps. An FY06 distribution upgrade is possible at either the FY05 result or closer to the 1H06 result.
Attractive value in low interest rate environment. BBI is building a track record of distribution yield growth with measured acquisition risk and limited operational risk. These qualities are attractive in a low interest rate environment and should provide a buffer to any potential downside in the security price. Macquarie hold an Outperform recommendation on BBI and a 12-month price target of $1.75.
Investors and traders looking for short to medium-term leveraged exposure to the BBI share price should consider Macquarie Instalments for a higher risk, higher return alternative to direct share investment.
