Babcock and Brown LtdRisks to Balance Sheet and P&L IncreaseWe...

Babcock and Brown Ltd
Risks to Balance Sheet and P&L Increase
We cut our rating to Hold, due to the increasing likelihood that BNB may use
valuable balance sheet capacity to bail out another listed fund, rising balance
sheet and profit & loss pressures as market values of its managed funds
deteriorates further, and the potential for real estate write-downs.
In lowering our advisory, principal investment and General Property Trust Joint
Venture (GPT JV) estimates, we have cut our EPS forecasts by 8%-15% p.a.
over CY08e-CY10e. Our target price falls more significantly, -47% to $13.55,
reflecting a peer group comparison, less a 30% discount for the risks mentioned.
The prolonged refinancing of BBP is the latest headache for BNB, following its
buyout of the failed B&B Environmental, capital injection into Tricom, expensive
refinancing of its own balance sheet, BBI’s controversial additional investment in
WestNet Rail and the cross-lending arrangement with BBI during the latter’s
acquisition of European port assets. Aside from the opportunity cost of using
valuable balance sheet capacity to aid BBP’s refinancing, further pressures exist
in the form of the significant deficit between the market value and carrying value
of BNB’s investments in its managed funds (-$250m) and potential write-downs
on the group’s investments in BNP Residential and GPT JV.
While the stock appears cheap and trends in some of its core asset classes are
solid, the damage done to BNB’s bra