BAM - Brookfield Asset Management

[100 Shares]

At year end 2015, common equity was $21,568M. This is the IRFS or "mark-to-market" value of their assets. Is there a way to figure out what the equity would be at cost?

[longlake95]

anyone adding to this as it gets back to the low 40's? The Brazilian pipeline deal seems right up Flatt's alley.

[longlake95]

just some back of the envelope tinkering...if you buy BAM.a at 42.50 and they grow BV at 8% p.a. vs. 18% over the past 10 years, then you'll see a all in return of 12%-19% CAGR. Assuming the market values BAM.a at NAV or a bit of premium to NAV at some point, like the market did in 2007, when BAM.a was priced at 1.4*NAV. That's a stretch, I've used 1.2* NAV for the high bar. They seem to have no trouble raising capital lately. I wonder, though, if as rates tick up in the US, will that pull institutional fee bearing capital away from the a asset managers like BAM, or will they stay as they are looking for higher/stable returns?

 

 

[plato1976]

how do you define BV? BAM's book value per share is below 30 now

 

just some back of the envelope tinkering...if you buy BAM.a at 42.50 and they grow BV at 8% p.a. vs. 18% over the past 10 years, then you'll see a all in return of 12%-19% CAGR. Assuming the market values BAM.a at NAV or a bit of premium to NAV at some point, like the market did in 2007, when BAM.a was priced at 1.4*NAV. That's a stretch, I've used 1.2* NAV for the high bar. They seem to have no trouble raising capital lately. I wonder, though, if as rates tick up in the US, will that pull institutional fee bearing capital away from the a asset managers like BAM, or will they stay as they are looking for higher/stable returns?

[Yours Truly]

how do you define BV? BAM's book value per share is below 30 now

 

just some back of the envelope tinkering...if you buy BAM.a at 42.50 and they grow BV at 8% p.a. vs. 18% over the past 10 years, then you'll see a all in return of 12%-19% CAGR. Assuming the market values BAM.a at NAV or a bit of premium to NAV at some point, like the market did in 2007, when BAM.a was priced at 1.4*NAV. That's a stretch, I've used 1.2* NAV for the high bar. They seem to have no trouble raising capital lately. I wonder, though, if as rates tick up in the US, will that pull institutional fee bearing capital away from the a asset managers like BAM, or will they stay as they are looking for higher/stable returns?

 

Morningstar show BV at 1.5 right now? Are you using some adjusted NAV figure?

[plato1976]

how do you define BV? BAM's book value per share is below 30 now

 

In the latest shareholder presentation, they still maintain a $160 fair value in 10 years and $90-$110 in 5 years

Not sure how many folks here agree with this prediction and what's the biggest risk?

 

just some back of the envelope tinkering...if you buy BAM.a at 42.50 and they grow BV at 8% p.a. vs. 18% over the past 10 years, then you'll see a all in return of 12%-19% CAGR. Assuming the market values BAM.a at NAV or a bit of premium to NAV at some point, like the market did in 2007, when BAM.a was priced at 1.4*NAV. That's a stretch, I've used 1.2* NAV for the high bar. They seem to have no trouble raising capital lately. I wonder, though, if as rates tick up in the US, will that pull institutional fee bearing capital away from the a asset managers like BAM, or will they stay as they are looking for higher/stable returns?

 

Morningstar show BV at 1.5 right now? Are you using some adjusted NAV figure?

[John Hjorth]

Is this article less of a concern to those when you consider that asset sales have an impressive track record of being ABOVE what was stated on the books?

 

BAM does have a history of being conservative on the balance sheet. So to those who are bearish on BAM -- I ask what is different now?

 

Eric,

 

I'm sorry for the very long ping/response time here. This has caught my attention, based on the topic you started not so long ago in the general discussion forum, with responses from among others Uccmal and Jurgis.

 

What matters here is that  [historical] cost accounting is of no relevance doing financial and performance reporting for this kind of investment for the short term, when the investment is for the long term, and at the same time not-listed.

 

IFRS reporting is the only way to go with a thing like this, for short term financial reporting.

 

The first question I ask my self with this thing is: Is the discount rate for each kind of investment - used in the calculation of the net present value of each type project - reasonable?

 

It's in the financials for 2015 for BAM, p. 29, [if I remember correctly], and to me the individual discount rates does not only seem reasonably, but also - in them selves - provides a margin of safety.

 

The above mentioned does not imply, that the comments and links from KCLarkin does not need attention. [Thanks, KCLarkin].

 

I will get back to that here.

[no_free_lunch]

Can anyone comment on BAMs history over the past decade?  Just trying to reconcile the relatively flat share price with their growth claims.  It looks like their funds from operations per share have been flat over the past decade so I don't know that the valuation has become any more attractive.  I assume their was some dilution from the financial crisis?

[racemize]

Well, the past 10 years included the financial crisis, but probably more importantly the transformation into the asset management company it is now.  So all of those investments are into very high growth fees as well as the carry on the partnerships that are not booked until completion of each fund.  Add to that that outside of the fees, the sales of assets are a bit lumpy and you get where we are right now.

[sys]

trying to reconcile the relatively flat share price with their growth claims.

 

are you accounting for splits and spinoffs?

[no_free_lunch]

sys,

 

No, and that is a problem.  It looks like there was a 3/2 split so based on that AFFO is up by 50%.  It looks like there were at least 2 spinoff's, the more recent one was relative minor, like a regular dividend.  The earlier one I haven't found the info on yet.  I also found that they do not include their carried interest in FFO and given the huge surge in investment management that is material.  I am also looking at USD values and much of their investment is non-US so there has been a substantial currency drag as well.  So as I am learning more it does appear they have grown ffo/share but not sure exactly how much.

 

I found a post on brooklyn investor laying out a fairly simple methodology to value BAM.  It is very dependent on the multiple assigned to the asset management business but it looks like the company is more or less fairly valued:

 

$22/share equity

$8.5-12.5/share asset management business

 

$30.5-34.5/share value vs a $33 share price?  I think there might be $1/share accrued carried interest so a touch higher but kind of in-line with current price.  Do people agree, see reason for a higher valuation?  I realize they are growing their asset management business like mad so perhaps it is more of a GARP candidate?

[racemize]

It is definitely GARP.  You can get fair values up to $40 or so, but most of it is based on the growth they will get over the next 10 years.  Their investor day presentations lay out the plan pretty well.  They usually meet their targets.

[chrispy]

I am still trying to understand all of the nuances about the business.  Funds from operations (FFO) have gone up ~27% from 2015 to 2016. With the recent run up in share price, the share/FFO is ~11.8.  Is that an accurate metric?

 

It sounds like the realized carried interest should grow and contribute more as the capital they have invested matures? 

[racemize]

I just helped edit an article on BAMs valuation that might help. This guy uses BAMs previous technique to get to the intrinsic value.

 

http://seekingalpha.com/article/4047597-brookfield-asset-management-valuation-2016

[vinod1]

I just helped edit an article on BAMs valuation that might help. This guy uses BAMs previous technique to get to the intrinsic value.

 

http://seekingalpha.com/article/4047597-brookfield-asset-management-valuation-2016

 

Thanks Race. Good writeup.

 

One minor quibble, the author removes the "Brookfield Capital portion of earnings".

 

A reason for including them is that the publicly traded partnerships are worth what  they are based on the present value of their cash flows which includes the expense associated with fees that the parent asset management company charges. So to BAM the fees represent additional source of value even though some of it is coming from its own capital.

 

So if you want to exclude the fees fine. Then you should increase the value of the publicly traded partnerships since the portion of the fees attributable to the parent asset management company are no longer an expense.

 

Not sure if I am explaining it well enough.

 

Vinod

[racemize]

I didn't quite follow that.  Perhaps I kind of get it.  Anyway, he had contacted Brookfield about his method and they seemed to think it was pretty good (though there was quite a bit of debate on the taxes, which I was quibbilng with). 

 

They also used to have some right-ups for lower than book value and "franchise value" which might have offset the fee earnings adjustment.  He doesn't make that adjustment as it is too hard to do from the outside.

[chrispy]

Thank you racemize, that was very informative.

 

Do you see any issue with the ability to continually create new funds, allocate more and more capital, while still maintaining a high ROIC?  Their future business is determined by their ability to produce high returns today, right?

 

Flatt in an interview did mention that this shouldn't be an issue due to the significant cost of real assets but I am curious what your thoughts are.  Is any concern on dilution of the brand name if BAM isn't able to continue their high returns?

[vinod1]

I didn't quite follow that.  Perhaps I kind of get it.  Anyway, he had contacted Brookfield about his method and they seemed to think it was pretty good (though there was quite a bit of debate on the taxes, which I was quibbilng with). 

 

They also used to have some right-ups for lower than book value and "franchise value" which might have offset the fee earnings adjustment.  He doesn't make that adjustment as it is too hard to do from the outside.

 

In every one of the the company's presentations they value the asset management company by including the fees from its own capital contribution. So I am surprised they did not point it out.

 

Take a simple example of a parent company (PA) which owns 100% an operating company (OP) and 100% of an asset management company (AM).

 

AM invests the PA capital and OP runs the operating assets.

 

operating company (OP)  has revenue of $5, expenses of $3 and a pre-tax profit of $2. Included in the expenses are $1 in management fees that it pays to the asset management company (AM).

 

asset management company (AM) has revenue of $1 and no expenses so it has a pre-tax profit of $1.

 

Now assuming the market values both companies at a pre-tax earnings multiple of 10, OP would be worth $20 and AM would be worth $10.

 

Now you can argue that OP paying $1 in management fees is a wash for the parent company (PA) and hence should not be included in the calculation. In that case OP would be worth $30, if you make that adjustment.

 

We have the same situation with BAM, except that it is not 100% ownership and it manages outside capital as well. But the logic remains the same.

 

I had the same first impression as the author when I first tried to understand why BAM is valuing fees that are generated on its own capital. If we do a pure earnings based valuation on all assets, this would be easy to see. But it is easier to do an asset based valuation on the subs and put an earnings multiple on the asset management firm. This obscures the economics of the business.

 

I might be wrong but that is how I understand why the company is valuing the fees on its own capital.

 

Vinod

[racemize]

Thanks for the explanation Vinod, I'll keep thinking about it.

 

Thank you racemize, that was very informative.

 

Do you see any issue with the ability to continually create new funds, allocate more and more capital, while still maintaining a high ROIC?  Their future business is determined by their ability to produce high returns today, right?

 

Flatt in an interview did mention that this shouldn't be an issue due to the significant cost of real assets but I am curious what your thoughts are.  Is any concern on dilution of the brand name if BAM isn't able to continue their high returns?

 

BAM invests along side the funds, so I hope that they will only raise funds to the extent that they can successfully invest it.  I tend to trust them that they will keep investing intelligently, but if they didn't, yes it would be a risk.

 

[chrispy]

Ah yes, that makes sense.

[Sionnach]

Not sure if it's been posted before but happened to come across this:

 

http://sirf-online.org/2013/03/11/paper-world-of-brookfield-asset-management/

 

Some valeant-like accusations in the article. Anyone have any thoughts on it's validity?

 

Is it the Lou Simpson curse?

[Jurgis]

Not sure if it's been posted before but happened to come across this:

 

http://sirf-online.org/2013/03/11/paper-world-of-brookfield-asset-management/

 

Some valeant-like accusations in the article. Anyone have any thoughts on it's validity?

 

Is it the Lou Simpson curse?

 

There were accusations in Barron's last year too. FWIW. No comment on content.

[Spekulatius]

THe article is from March 2013. So far, the house of cards still stands

[chrispy]

Since 2013 they have split off BBBU, BIP, BEP, and BPY to make the structure more easy to understand.  Investors are more comfortable with the business now that it is more transparent.

[WhoIsWarren]

There was a discussion on the BAM thread about SIRF / Roddy Boyd back when the article came out.....late Feb 2013.  It includes a link to / some discussion of Brookfield's own response to the SIRF article.  You might find this useful