CIBCEQUITY RESEARCH
March 16, 2022 Earnings Update
BROOKFIELD BUSINESS PARTNERS LP
Adjusting Price Target To Reflect The Creation Of BBUC
Our Conclusion
We have updated our price target to reflect the special distribution of BBUC units as well as the recent drawdown in U.S. and global public equity markets. BBU is screening inexpensively at a nearly 30% discount to the fair market value of proprietary investing capital versus a discount of 5% historically. Although the private equity names under coverage have
underperformed YTD owing largely to thematic headwinds (i.e., rising interest rates + declining equity market valuations), we believe BBU could have good torque to the upside if market conditions normalize, and particularly if a larger monetization event materializes in 2022. We rate BBU Outperformer with a revised price target of $37.
Key Points
Unit split completed. BBU announced the completion of the previously
announced creation of Brookfield Business Corporation (“BBUC”). The
special distribution of BBUC shares was equivalent to a unit/stock split,
where every unitholder received a single share of BBUC for every two units of BBU. Fundamentally, the creation of BBUC has no impact on NAV or our perception of value (other than the change in total ownership units/shares outstanding). However, the intent is to broaden the ownership base and make the company eligible for index inclusion.
Updating our price target to reflect the distribution of BBUC units. We
are lowering our price target primarily to reflect the increase in ownership
units outstanding. However, our price target declines by more than the “unit split” would imply, reflecting the risk-off equity market environment (and corresponding NAV impact) that has materialized since the last time we updated our price target in early February. Our updated price target of $37 is based on applying a 0.9x multiple to our one-year forward gross asset value forecast of ~$41. This is slightly lower than our previous price target multiple of 0.95x, reflecting compression in private equity valuations since that time (including Onex which had re-rated approximately 0.1x lower on a P/NAV basis).
BBU’s units screening inexpensively again. Against the backdrop of a
risk-off equity market environment and increasing likelihood of a rate
tightening cycle, the private equity names under coverage have
underperformed on a year-to-date basis. BBU nearly trades at a 30%
discount to the fair market value of its own proprietary investing capital,
versus an average historical discount of approximately 5%. As market
conditions normalize, multiple expansion could help support outperformance (even in the absence of a larger monetization event). We continue to like BBU for what we consider to be an asymmetric payoff profile, potentially sizeable catalysts on the horizon and good fundamental momentum in its core investments (Westinghouse, Clarios and Sagan).