BMO analyst Devin Dodge picks Brookfield Business Partners and Brookfield Infrastructure Partners as the two best stocks to buy now.
After meeting executives in September, Toronto BMO Capital Markets analyst Devin Dodge remains a strong supporter of the Brookfield companies, in particular its business services and infrastructure arms, thanks to strong investments that consistently outdo estimates.
Mr. Dodge joined BMO Capital Markets as a research associate in 2007 and received his CFA (chartered financial analyst) designation in 2011. Since January of last year, he has served as a director of equity research at BMO. The analyst names industrials conglomerate Brookfield Business Partners LP (TSX—BBU.UN; NYSE—BBU) as his “top pick” and utilities stock Brookfield Infrastructure Partners LP (TSX—BIP.UN; NYSE—BIP) as another top investing idea. Each receives an “outperform” recommendation from BMO.
BBU unit value could exceed US$75 over time
Spun off of Brookfield Asset Management in mid-2016, Brookfield Business Partners took over the bulk of private equity operations of its parent. The company boasts US$77 billion in assets under management and a workforce of 76,000. Within its varied portfolio are investments in: services businesses involved in health care, construction, and infrastructure (such as Westinghouse Electric Co. LLC, the former nuclear power division of the now-defunct Westinghouse Electric Corp.); industrial firms (like auto battery maker Clarios); and residential developments in major North American and Brazilian markets.
Mr. Dodge says: “Given the advancement of profit improvement plans across its portfolio and stronger market conditions compared to last year, management’s ‘liquidation NAV’ (net asset value) or current value estimate rose to US$54 to US$58 per unit, up around 33 per cent year-over-year. In the past, we believe Brookfield Business’ estimate of current intrinsic value has proven to be conservative. Moreover, management believes the potential value of the current portfolio could reach or exceed US$75 a unit over time, with further upside as capital is recycled into new investments.” The analyst points out that the company has already carved out a strong record in its relatively short existence.
“BBU has monetized nine of its investments, generating an internal rate of return (IRR) of roughly 30 per cent. In its current portfolio, we believe the larger investments in its portfolio are performing very well, including Westinghouse and (mortgage insurance company) Sagen (MI Canada Inc.),” which should support IRR remaining above targeted levels,” he says.
Westinghouse is on track to reach the upper end of its 2021 earnings before interest, taxes, depreciation and amortization (EBITDA) guidance target of US$700 million to US $800 million, while Sagen’s return on equity (ROE) has improved by around 500 basis points since it was privatized in February. Looking ahead, the analyst says, “For the last few years, Brookfield Business has been building up its technology-focused investment team. Capital deployment has been gradual but appears set to gain momentum. Management estimated that within the next five years, technology stocks and healthcare stocks could account for about 40 per cent of BBU’s NAV,” he says, adding that health is another recently-added industry within its portfolio.
Mr. Dodge recounts that management is focusing on “later-stage investments, with an emphasis on applications deeply entrenched within customer organizations”. Here, Brookfield’s vast corporate reach may be an advantage. “BBU believes its ability to leverage Brookfield’s relationships is a key strategic advantage.”
BIP assets generate stable cash flows
Brookfield Infrastructure operates a range of infrastructure assets, from ports to gas and hydro connections, power transmission lines, pipelines, and toll roads. Considering that it pays out a distribution of $0.64 per unit per quarter, Mr. Dodge says, “The yield is attractive while the payout ratio returning to its targeted range in 2022 could allow distribution growth to shift higher.”
Last February, the company announced the sale of subsidiary Enwave Energy Corp. in two chunks (one Canadian, the other American) in a deal valued at US$4.1 billion. (Enwave operates energy-efficient heating and cooling networks in urban areas. Brookfield acquired it in 2012 for $480 million from its then-owners, the City of Toronto and Ontario Municipal Employees Retirement System.) Mr. Dodge says, “The sale of Enwave earlier this year, at a roughly 30 times EBITDA multiple, highlighted the value that can be generated when BIP is successful in building businesses with strong organic and acquisition growth prospects. Relative to individual assets, management estimates these ‘platform investments’ generate IRRs (internal rates of return) more than 50 per cent higher while the multiple of capital can be two times or more.”
The analyst says that, according to management: “Brookfield Infrastructure believes it has several other platforms in development.”
Mr. Dodge also highlights, “Over the next five years, BIP expects to deploy US$650 million into data centre developments, which should support a five times increase to EBITDA versus 2021.”
This is an edited version of an article that was originally published for subscribers in the October 15, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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