November 16, 2020
Brookfield Asset Management Inc. From five to eight; price target +$5 to $45
Our view: With the support of more buoyant global markets (equity and credit) and a return to greater normalcy in daily life around the globe, Brookfield Asset Management (“BAM”) delivered what we see as an all-around strong set of Q3 results. We reiterate our view that the organization's financial strength and liquidity, and fundraising momentum have possibly never been better. We believe BAM’s shares are undervalued. On the back of a higher IVPS estimate, as well as higher OFFO/share estimates, we have increased our price target by $5, to $45. We reiterate our Outperform rating on BAM's shares.
Key points:
Q3/20 OFFO/share +25% – As reviewed in our First Glance note and herein in more detail, Q3/20 Operating FFO/share of $0.53 ($850MM) was +25% from Q3/19’s $0.42 ($662MM) and 15% above our $0.46E ($748MM).
Five investment verticals are soon to be eight – BAM’s plans for the H1/21 BAMRe spinout received a lot of interest last week. We discuss this entity, which is worth $0.33 per BAM share, in more detail herein (pages 8-9). Establishing BAMRe today is, in our view, all about setting- up a standalone reinsurance enterprise in the most efficient fashion (i.e., Bermuda-domicile). Rather than BAMRe, we believe investors should be more attuned to the evolving drivers of FBC. In this regard, BAM will be back into the market with its next round of flagship funds, starting with the real estate fund (BSREP IV) in early 2021. We believe this next round of flagship fundraising bodes well for growth in FBC through to the end of 2022, and by extension, FRE through to 2023. Thereafter (the mid-term; or three- five- to seven-years out), we believe BAM’s FBC will be propelled by the continued growth of its five existing investment verticals (i.e., 1) real estate; 2) renewable energy; 3) infrastructure; 4) private equity; and, 5) credit), but also the growth of three new verticals, including: 1) reinsurance; 2) impact funds; and; 3) secondary funds, which we believe will begin to attain some size, scale and momentum within several years. This continued broadening of product and fund offerings into areas that are adjacent, and/or complementary to BAM’s “legacy” skill sets, should allow BAM to garner a deeper share of client investment allocations. We believe these are the powers of the BAM asset management franchise.
Attractive Valuation – Relative to our mid-August 2020 update, the strength in listed equity markets, and BAM’s retained cash flows have lifted the TNAV component of our IVPS estimate by $5, to ~$22, from $17. Principally due to a higher FRE run-rate, our asset manager valuation also moves higher by ~$2/share, to $20. On this basis, BAM’s shares are currently trading at a wide 13% discount to our IVPS. Based on ~$1.4B of forecast FTM FRE, the implied Asset Manager FRE multiple is 14x currently, which we see as “cheap”.
Price Target +$5 to $45; Outperform rating reiterate