No. of Recommendations: 21
Results seemed fine. Their recently adopted private equity metric of distributable earnings before dispositions made them look better than fine, although the market does not seem to be buying it. A lack of dispositions stunted growth a bit but is not unexpected given the Q1 transaction climate. All the metrics are a bit flaky given "adjustments" for the BAM spinout.
They seem to be depending more and more on carry to explain the enormous difference between book and "blended" value. More than half of their estimate of the value of the asset management franchise is now carried interest. A big piece of that is "target" carry, which assumes performance benchmarks being met or exceeded in a wide variety of funds going forward, including real estate. This might be part of what the market is discounting, not to mention listed book value of the real estate portfolio itself.
Here's a link to the supplemental, where all these numbers hide out:
https://bn.brookfield.com/sites/brookfield-bn/file...I can't make head or tail of their "returning capital to shareholders" claims, and judging by the call, neither can analysts.
First, they give themselves credit for a massive return to shareholders in the BAM spinout, ignoring the fact that old BAM/new BN shares got slammed as a result. Judging by my holdings, shareholders are poorer today than pre-spin, although it's impossible to know how much of that is macro market conditions. It is probably true that if the market gave BN credit for its 75% stake in BAM at the multiple it has awarded BAM, shareholders would be net beneficiaries. Either that hasn't happened yet or the market is discounting BN's other invested capital by a very large amount. Either way, hardly the shareholder windfall to date that they want credit for. Maybe they're talking about the robust BAM dividend, but they compensated by cutting the parent's dividend in half. Given the proportions of the spin, it didn't alter the take much.
Second, buybacks remain modest -- a net share count reduction in Q1 of 7.6 million shares, or 0.4% (1,628.9 million at Dec. 31, 1,621.3 million at March 31). For context, shares outstanding two years ago were 1,577 million. Then they issued a bunch in connection with acquisitions, pledging to buy them back over time. Recently, they've talked about more aggressive buybacks to address undervaluation, even suggesting a tender offer might be coming. Still, they haven't even bought back the shares issued for those acquisitions a couple years ago, let alone embarked on a more ambitious program to address undervaluation.
Two of the first questions on the call were to this effect: If you think the shares are so undervalued, what would it take to make you do significant buybacks? Nick Goodman's first answer was they're already devoting 25% of free cash flow, which seems a stretch if you do the math (~$4 billion of LTM cash flow, $746 million of LTM buybacks). He emphasized they're putting cash flow into their growing insurance business, which creates opportunities in their credit business and other symbiotic effects. In other words, more attractive than buybacks.
A second analyst followed up by asking if they would consider monetizing some assets to finance more buybacks. Goodman responded with boilerplate -- that is always a possibility when assets can be monetized at favorable rates of return.
Bruce Flatt talked about undervaluation and buybacks again in his introductory remarks, so maybe something more significant is on the way. For now, Mr. Market can be forgiven for thinking that until they put their money where their mouth is in a much bigger way, the claims of vast undervaluation should be taken with a shaker of salt.
