Has a US$32.00 target. GLTA
EQUITY RESEARCH May 6, 2024 Earnings Update
BROOKFIELD BUSINESS PARTNERS LP
Clarios Remains A Focal Point After Another Strong Quarter
Our Conclusion
Clarios remains very much in focus following a string of three strong
quarterly prints and the prospect of an IPO which could represent an
important catalyst for the shares. On balance, we felt that the Q1 update was
generally positive considering the persistence of strong growth trends at
Clarios and the outlook for further earnings upside (which greatly outweighed
any challenges at Healthscope).
Key Points
Clarios deleveraging offers flexibility from a monetization standpoint.
Adjusted EBITDA increased 23% Y/Y versus 17% in the prior quarter. The
persistence of strong growth trends bodes well for a future IPO. In the letter
to unitholders, Brookfield indicated that the rapid deleveraging of the
business offers flexibility to consider a variety of other options to generate
proceeds as well. Management acknowledged that a dividend
recapitalization or perhaps a partial sale of the business could be on the
table. On an LTM basis, Clarios’ balance sheet leverage stands at ~4.1x,
which is approaching a level that management feels would be more optimal
for an IPO attempt (i.e., sub-4x).
Management sees potential for further earnings upside at Clarios. The
company is approximately two-thirds of the way through a $400 million
“operational improvement” plan (which compares to current run-rate EBITDA
of approximately $2 billion), and sees further upside associated with that
initiative. Secondly, the transition towards advanced batteries (which
generate twice the margin of conventional SLI batteries) provides a structural
tailwind. Management highlighted how 30% of sales were for AGM batteries
in the quarter versus single-digits when Brookfield initially acquired the
business. Lastly, the global car parc continues to grow, which should
produce some incremental earnings growth over time as well.
CDK results attracted a bit of attention in Q1. Although much of the Y/Y
EBITDA growth was related to an increase in BBU’s economic ownership,
the headline print prompted some interest and discussion on the conference
call. Management indicated that EBITDA margins have increased from 33%
at the time of acquisition (i.e., only two years ago) to 47% in the current
quarter. Assessment of the organic growth trajectory has been obscured to
some degree by the sale of a non-core division last year, but management
has indicated that recurring revenues are up significantly and continue to
grow as it focuses on more profitable revenue streams.
Healthscope navigating some challenges. Management acknowledged
that it is focused on executing an improvement plan to address the
underperformance of the business. EBITDA was down 36% Y/Y, driven by a
variety of headwinds including high labour and consumable costs, a
changing mix of patient activity and capped reimbursement rates. We note
that BBU’s invested capital amounts to only ~$0.3 billion versus a total net
asset value that would be in excess of $8 billion.