BAM BBU BEP BIP BPY Games Samuel Smith

Brookfield Asset Management Shows Why It Is My Highest Conviction Buy – Brookfield Asset Management Inc. (NYSE:BAM)

Is The Great Rotation Into Equities After A 37-Year Run In Bonds Finally Upon Us?

Brookfield Asset Management (BAM) delivered a powerful Q3 report, reflecting continued robust progress throughout the enterprise alongside a robust stability sheet, nicely-positioned to capitalize on potential volatility in any of its goal markets. Regardless of the robust response from the market since earnings got here out, shares are nonetheless a discount and as such stay my highest conviction purchase.

Vital Liquidity

Complete liquidity (together with core liquidity and uncalled personal fund commitments) in Brookfield stood at a strong $32 billion at quarter finish, bolstered by quickly rising free money stream ($2.three billion TTM). This places them in a really versatile place to react opportunistically to volatility of their goal companies and geographies. Moreover, they’ve $27.eight billion in publicly-listed investments on their stability sheet. These publicly-traded models – whereas seen as lengthy-time period investments by administration because the core of their invested capital – could possibly be liquidated (no less than partially) pretty simply within the case of a monetary emergency and may subsequently be thought-about as a further a part of their liquidity. When mixed with the resilience of their diversely sourced money flows, their A-credit standing seems nicely warranted.

Robust Progress

Along with reporting a really conservative and versatile monetary positioning, BAM loved one other quarter of robust progress. Q3 FFO elevated $300 million yr-over-yr in comparison with $800 million final yr and the asset administration enterprise raised a further $12 billion of capital whereas deploying $25 billion of latest capital as complete belongings beneath administration (AUM) have now reached over $330 billion. Charge associated earnings grew at a really strong 63.5% between 2017 and 2018. Carried curiosity additionally grew ~50% yr-over-yr. FFO/share grew by 35% yr-over-yr in Q3, bringing TTM FFO/share yr-over-yr progress to 23.three%. Free money stream additionally noticed robust progress: up 38% yr-over-yr in Q3 and up 22.6% TTM yr-over-yr.

One other constructive was that the outcomes of the Brazilian election ought to bode properly for his or her companies in Brazil by leading to extra professional-enterprise insurance policies being enacted whereas additionally decreasing financial uncertainty hanging over a few of BAM’s funding alternatives within the nation.

Compelling Worth

Given the big liquidity, draw back-hedged financing/foreign money hedging/worldwide diversification, and really speedy progress, it’s astonishing that shares commerce for ~10x TTM FFO (which, keep in mind, ignores carried curiosity) and ~18.7x TTM FCF, each of that are rising at properly over 20% yearly. These metrics clearly appear to point that shares are a compelling discount.

It can also be fascinating to notice that regardless of progress accelerating and the enterprise turning into considerably bigger and apparently more healthy over the previous yr, shares have gone virtually nowhere throughout that span.

ChartBAM knowledge by YCharts

A ultimate metric by which shares look like significantly undervalued is by summing the listed valuations of the investments on their stability sheet after which discovering what a number of their asset administration enterprise have to be buying and selling at given the present market cap. The listed worth of all of their invested capital minus working capital is $25.024 billion. In the meantime annualized asset administration internet revenue stands at $1.739 billion. Provided that the market cap presently stands at slightly below $43 billion, because of this the asset administration enterprise is at present buying and selling at a a number of of ~10.35x TTM earnings. That’s an astonishingly low a number of for a enterprise with a robust moat, stability sheet, administration and progress monitor report, and progress outlook. The low cost seems to be even wider if you understand that the market is probably going significantly undervaluing Brookfield Property Companions (BPY) and Brookfield Renewable Companions (BEP) – the 2 largest holdings on BAM’s stability sheet – and the opposite listed partnerships Brookfield Infrastructure Companions (BIP) and Brookfield Enterprise Companions (BBU) have a robust monitor document and complete return outlook as nicely.

Path To Unlocking Worth

Past the robust underlying fundamentals and the apparently clear worth disconnect, I additionally discover administration’s clear capital allocation plan as a extremely engaging and low danger solution to unlock appreciable worth for shareholders. BAM is already producing nicely over $2 billion in free money circulate yearly and is rising this quantity at over 20% per yr whereas additionally compounding carried curiosity. Management forecasts producing $60 billion in free money stream over the subsequent 10 years of which it plans to reinvest $10 billion and return $10 billion in dividends. In the meantime $40 billion shall be obtainable for no matter makes use of administration sees match to maximise shareholder worth. Provided that this quantity is almost equal to the present market cap, shareholders are taking a look at a really robust complete return proposition if this capital may be deployed prudently.

Management signifies that it’ll almost certainly be used for share repurchases, which at present valuations must be extremely accretive. Moreover, if such a big sum is actually devoted to share buybacks, it is going to truly release greater than $40 billion of money for buybacks as a result of it should scale back the whole quantity paid out in dividends (because the complete float might be decreased).

BAM additionally outlined one other means by which they’re at present concentrating vital sums of capital to comprehend worth: shopping for up extra BPY models. Management believes that – in line with its IFRS accounting valuation – BPY models are buying and selling at larger than a 50% low cost to underlying NAV. Consequently, they’re including a substantial amount of models (and plan to proceed doing so) to their already giant stockpile of BPY models (it’s BAM’s largest single holding on its stability sheet by far). In so doing, they consider they’re acquiring over $1.50 of shareholder worth for each $1 invested. Moreover, by buying and holding an growing variety of BPY models, they’re enhancing their provide-demand stability, exerting upward strain on unit costs. Moreover, BPY administration can also be planning on repurchasing a substantial sum of BPY models to additional unlock worth for buyers. If BPY models return near NAV, BAM shareholders will stand to realize a hefty sum (over $7.5 billion of market cap or a 17.5% share worth improve at present ranges).

Investor Takeaway

BAM’s stability sheet and progress outlook seem as robust as ever, whereas its shares are clearly deeply discounted and administration’s plan for unlocking worth for shareholders is low danger (merely counting on executing buybacks/BPY unit purchases at accretive ranges). So long as international actual asset costs stay sound, BAM ought to present very robust danger-adjusted returns over the subsequent decade. It stays my prime purchase and my largest holding by far. If I might personal just one inventory, BAM can be it.

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Disclosure: I’m/we’re lengthy BAM, BPY, BEP, BBU, BIP.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

Further disclosure: I’m a member of the Excessive Yield Landlord analysis staff

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