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May 5, 2024
Brookfield Business Partners L.P. Q1/24 Company EBITDA was below our forecast
Our View: Q1/24 results were below our forecast, but there were incremental positives such as additional recycling of capital (e.g., announced sales of Hammerstone and most of the Greenergy business) and debt re-financing activity that helped to fund a dividend payment (the Entertainment business) or done at tighter credit spreads (BrandSafway). Bigger picture, BBU’s shares trade at a substantial 45% discount to NAV. We think there could be substantial valuation upside in the near-term (strong NAV growth + significant narrowing of the discount to NAV) if they continue to execute generating growth in their portfolio and surface value through asset sales/IPOs should monetization markets become more favorable. Maintaining our Outperform rating, but trimming our target to US$31 (was US$32) due to lower financial forecasts.
Key points:
Q1/24 Company EBITDA of US$544MM was below our US$586MM forecast and consensus at US$563MM. The slightly lower Company EBITDA was primarily due to lower-than-forecast results at Multiplex. Company EBITDA on a segmented basis were as follows: (1) Industrials: US $228MM, below our US$242MM forecast, but in-line with consensus at US$229MM; (2) Infrastructure Services: US$143MM, slightly below our US $149MM forecast and consensus at US$150MM; (3) Business Services: and US$205MM, below our US$225MM forecast and consensus at US$220MM; and (4) Corporate & Other: Negative -US$32MM, compared to our negative -US$29MM forecast and consensus at –US$30MM.
BBU continues to make progress recycling capital, monetizing additional smaller and/or legacy investments. On March 3, 2024, BBU reached an agreement to sell most of its Greenergy (road fuels distribution) business with the transaction expected to close in Q3/24. In addition, on May 2, 2024, BBU reached an agreement to sell Hammerstone (Canadian aggregates production operation), a long-time investment, with the deal expected to close in Q3/24 and BBU saying its share of proceeds being ~US $135MM.
BBU also remaining active refinancing debt at portfolio companies. For example, in February 2024, BBU completed a US$450MM up-financing at its Entertainment division with proceeds used to fund a dividend to shareholders (BBU’s portion was US$62MM). In April 2024, BrandSafway re-priced a US$1.3B term loan at SOFR + 4.50%, which was done at a 100bps tighter spread and was able to raise an additional US$0.2B (US$1.5B total).
Trimming target to US$31/share (was US32), but maintaining our Outperform rating. The lower target reflects slightly lower financial forecasts recalibrated following Q1/24 results that were below our forecast.
