Brookfield Business Partners (BBU) 4Q2018 Results Analysis shows growth in operations and progress towards becoming a diversified industrial and services company with operation excellence and optimized capital structure.
BBU is facing some challenges in its Multiplex operations in Middle East which has been a disappointment dragging down the better results in UK and Australia. Ideally this child company needs to turn around and start paying annual dividends to the parent. It has a backlog of $8B as of now 85% of which is in UK and Australia. There are also some challenges in the Teekay Offshore Marine Services business which is restructuring and trying to grow out of its debt.
On the positive side operations in Graftech (EAF) continue to be strong and cash generation over next 4 years using long term contracts (65% of capacity) significant value can be extracted and redeployed. It is quite possible that EAF may still retain significant value beyond that based on where Graphite EAF prices end up. EAF currently trades at $3.82B market Cap ($6B enterprise value) which implies a $1.03B value to 27% ownership of BBU in EAF.
BRK Ambiental the Water Services business is well positioned for growth in 2019 and 2020 with the new Brazil governments focus on sanitation and business friendly regime. Other Services business perform to expectations.
Westinghouse seems to be well on its way to a turnaround with already 33% of initial capital investment dividend out after just 6 months of operations. There is a good possibility that Westinghouse could end up being a multi-bagger investment just like EAF over next 2-3 years once costs are optimized, customer service excellence is entrenched and there is a strategic acquisition in the power infrastructure services are to grow this company.
BBU acquisition of Healthscope in Australia which owns 43 hospitals in Australia and a market leading international pathology operation (clinical labs) in New Zealand is a promising entry into the Health Care Infrastructure and |Services business. It would be interesting if this knowledge can be applied to the North American market over the next 2-3 years to make an entry in the long term nursing care industry. BBU plans to invest $250M as its share in Healthscope which equates to ~ $1.95 per unit of BBU.
BBU acquisition of Johnson Controls Power Solutions (Battery) business in mid 2019 could provide another great opportunity to diversify and grow the company and work its magic by optimizing the operations and capital structure of the company. BBU plans to invest $750M as its share in Power Solutions which equates to $5.8 per unit of BBU.
During the year 2018 BBU invested approximately $500 million in high quality businesses across our sectors and geographies and generated $1.5 billion from monetization activities. There is scope of significant per unit asset value growth at BBU over next 4 years. The company has come a long way since its spin off from BAM in 2015. We believe the units are valued at between $45 to $50 range which is significantly higher than the $32 recent trading range. The key question is whether units will continue to languish at a large discount to NAV over the long term due to the external management by BAM and the fee structure. Inspite of this discount if BBU grows its per unit NAV over the next 4 years the market will need to re-rate the stock and BAM has incentive to have the units trade close to NAV to continue to harvest incentive fees so interests are well aligned in out opinion. We ascribe a target price of $45 to $50 for 2019 year end.
BBU 4Q2018 Letter To Unitholders
BBU 4Q2018 Results Presentation
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