Brookfield Asset Management Voting Ord Shs Class A T.BN.PF.A

RBC 2

[retiredcf]

Their upside scenario target is US$76.00. GLTA

December 6, 2022

Outperform

NYSE: BAM; USD 43.35; TSX: BAM.A

Brookfield Asset Management Inc.

Wax on, wax off: Valuation analysis of the Asset Manager spinoff

Our View: Much like The Karate Kid, while a bit of patience was required to complete the spinoff, we think it will be worth it for investors. Following up on our November 2, 2022 BAM Asset Manager Spinoff Primer report, our note today digs deeper into valuation for BN and New BAM ahead of Monday, December 12, the first day that the new entities will be publicly traded. Based on when issued share prices, New BAM is trading at just under 23x our FRE forecast, which implies a significant 26% discount to NAV for BN. While we like the long-term growth story for New BAM, based on current when issued prices, we see more attractive relative value in BN. Bigger picture, we see both BN and New BAM as attractive vehicles for investors to gain positive exposure to Brookfield’s long-term investment track record. We maintain our Outperform rating, US$63 target.

Key points:

Note: Please see our November 2, 2022 BAM Asset Manager Spinoff Primer report "Primer for Asset Manager Spinoff: Breaking Up Isn’t Hard To Do", which explains BAM’s Asset Manager spinoff in greater detail as this report focuses on post-spinoff valuation analysis for BN and New BAM. Key parts of our report:

• Page 2: Important to read as it outlines the key terms we use in the report to identify the various Brookfield entities.

• Page 3: Outlines how we value BAM, which trades at a 20% NAV discount.

• Page 4: We provide our thoughts the “when issued” market so far.

• Pages 5-8: We discuss how we think New BAM may be valued and go

  into greater detail vs. our Nov. 2, 2022 Primer report looking at BAM’s valuation vs. Blackstone, which we think is the peer that BAM is likely to be compared to the most. Initially, we think New BAM could trade between 18x to 23x FRE (US$26 to US$33/share, see Exhibit 8), but over time could trade closer to 30x reflecting its status as one of the purest private equity/alternatives asset managers given: (1) clean balance sheet with zero principal investments; (2) no debt with US$2.8B of cash; and (3) initially no realized carried interest as BAM forecasts no meaningful realized carried interest until 2027 (i.e., New BAM is likely to be a very highly-exposed management fee story over the next several years).

• Pages 9-11: We discuss how we think BN is likely to be valued (Exhibit 9). If BN also trades at BAM’s 20% discount to NAV, using our 18x to 23x FRE above, this implies a BN share price of US$35 to US$39/share (Exhibit 11). We provide 2 sensitivity tables: (1) given the increase in interest rates, Exhibit 10 shows how the BN discount to NAV changes based on various FRE multiples and % discount to IFRS value for BN’s Real Estate assets. The key takeaway is that even a very significant decline in value of BN’s Real Estate assets implies a meaningful or significant discount to NAV; and (2) Exhibit 11 shows the implied BN share price and valuation upside based on various FRE multiples and what an investor believes is the appropriate BN discount to NAV.