Revised Targets Given its global operations and exposure to manufacturing, Brookfield Business Partners LP’s likely has “complex supply chains, which could pose a risk in the near term,” according to IA Capital Markets Matthew Weekes.
“Overall, however, we expect BBU’s strong diversification and essential nature of many of its businesses to help insulate against macro shocks,” he said. “Despite delivering strong Q4 results, with numerous tailwinds including recovery from COVID-19 and commodity price exposure in certain areas, BBU’s stock has underperformed year-to-date (down almost 9 per cent), which we believe creates a buying opportunity for investors.”
Mr. Weekes said Brookfield’s fourth-quarter earnings beat reinforced his positive outlook with number businesses across its portfolio performing “well.”
“Adj. EBITDA and earnings from operations beat estimates by a wide margin, with numerous contributing factors in both core businesses as well as some of the lesser talked about areas of the portfolio. These included a beat from Westinghouse, which offset timing and seasonality impacts from the prior quarter, oil price tailwinds related to certain profit-sharing agreements at Altera Infrastructure, tailwinds on natural gas prices at Ember Resources, and general recovery from COVID-19. Many of these tailwinds will likely continue, contributing to continued growth along with BBU’s ability to implement business improvement plans at recently acquired companies.”
In response to its recent special distribution of Brookfield Business Corp. shares, he cut his target to US$39 from US$58 from with a “buy” rating. The average is US$45.67.
Elsewhere, Scotia’s Phil Hardie cut his target to US$38 from US$58 from with a “sector outperform” rating.
“We believe the unit split and C-Corp spin-off is likely to expand the investor base and support the narrowing of the NAV discount,” he said. “In our view, the restructuring provides investors with greater flexibility to invest in BBU’s underlying portfolio and targeted returns. The two entities are economically equivalent, but the corporate structure is likely to appeal to a broader investor base. The corporation likely has the potential to: (1) increase holdings from U.S. retail investors given simpler, or more favourable, tax attributes; (2) enhance institutional investor interest to include those that are not able to, or prefer not to, invest in LP units; and (3) be included in additional indices and ETFs that do not allow LPs.”
“We continue to view BBU as a top value idea with the stock trading at a wide discount despite stronger operating trends and a solid growth outlook. Our current target price implies a total return of 35 per cent over the next 12 months. We are projecting NAVPU to grow a solid 19 per cent in the coming 12 months, with the bulk of the growth being driven by its large platform companies.”