IA Capital Upgrades Again After recent price depreciation, iA Capital Markets analyst Matthew Weekes sees upside in Brookfield Business Partners L.P. , calling it “a public way to own a private equity strategy.”
“We believe that BBU is positioned to deliver robust NAV [net asset value] growth as it seeks to monetize assets that are at or near maturity, continues to enhance EBITDA in existing operations, and redeploys capital to further expand and diversify its operations and provide new growth platforms,” he said upon assuming coverage in a research note released Thursday. “Given BBU’s proven track record of realizing strong capital appreciation on investments, we believe that targets set out by the Partnership to continue growing NAV at a 15-per-cent CAGR [compound annual growth rate] over the next five years are highly achievable.”
Mr. Weekes expects “robust” growth to continue, seeing Brookfield possessing a “competitive advantage in sourcing and executing attractive deals through its partnership with Brookfield Asset Management Inc.”
“In addition to corporate liquidity for bridging future transactions, BBU’s existing portfolio companies generate strong distributable cash flow, and BBU has also noted potential up-financing opportunities,” he said. “While we expect BBU to continue to exercise patience, several of its businesses are likely at or near maturity, and with the series of acquisitions announced year-to-date, BBU appears to have reached a turnover point for its portfolio, which would indicate that a ramp up in monetizations is likely on the horizon.”
“BBU is targeting a per unit value of $110 in five years, which equates to a CAGR of 15 per cent. Given BBU’s track record of delivering average IRRs of 30 per cent on monetizations, we believe this is highly achievable.”
He set a target of US$57, up US$1 from the firm’s previous target. The average is US$53.50.
“BBU estimated its NAV at $54-58 per unit at its most recent Investor Day in September, with potential embedded value of $75+ per unit,” said Mr. Weekes. “This implies a current discount of 15 per cent for BBU’s units. We believe that the units tend to trade at a discount to BBU’s NAV estimate in part because BBU does not include corporate costs and management/performance fees in its NAV. However, we continue to see upside in the units based both on valuation upside for certain key assets and continued growth through the execution of the Partnership’s strategy.”