ubs research on bbp

26 November 2008
Babcock & Brown Power
Electric Utilities
12-month rating Buy
Unchanged
12m price target A$0.25/US$0.16
Sells Kwinana and Neerabup

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Net debt falls $640m to about $3.2bn despite reducing cash balances
The reduction is made up of $130m cash received net of $520m consolidated
project debt.

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The race is on
BBP secured debt facility has a review event to allow for the impact of the Federal Government’s proposed carbon scheme. Draft legislation for that scheme will be next calendar year but, as well as the costs, it will provide some potentially valuable cash compensation to the Flinders Power Station, not allowed for in our numbers. There is also the requirement to repay around A$200m to BNB next
September and a further $200m in March 2010. BBP needs to stay in compliance with the senior debt covenants for another 6 months while it works on selling the assets.

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Competitive tension
BBP’s 2009 EBITDA will be negatively impacted by Varanus Island. In addition the benefits of the Newman expansion will be available in 2010. On our 2010 estimates we calculate an EBITDA multiple of 8.1x before allowing for carbon benefits or costs. Even at a A$1 share price (more than 30x higher than yesterday’s close) our EBITDA multiple is under 10x.

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Valuation: Our valuation ~A$1; Our 12-month Price Target moves to $0.25c
BBP has no yield, and we think it has a (high) risk of being in covenant default and requiring asset sales to repay debt. Our estimated SOTP value is around A$1 but
we reduce our 12-month price target to $0.25 (from $0.97) in recognition of the risks.