The Brookfield Group Looks Ready For M&A
Good Operational Performance
Brookfield Asset Management, held by Lou Simpson and Ron Baron, counts with a liquidity position of more than $5 billion at the parent and principal subsidiaries along with nearly $10 billion drawable private fund commitments. More importantly, the company has expressed its interest into using this liquidity to make acquisitions. Management clearly stated in its letter to shareholders:
"We have a robust pipeline of exceptional opportunities in front of us in all of our businesses (...). Today, we are being offered a variety of attractive opportunities to acquire assets and assist companies with capital needs, as companies refocus their core strategies, and governments reconsider how they will deliver critical infrastructure and services."
Brookfield Asset Management has reaffirmed its interest in European attractively priced assets. With this in mind, and given that the company is usually more price sensitive than most investors, I think Brookfield Asset Management is poised to deliver great performance through buying European high-quality assets. That said, the company's valuation seems rich at 2013 18.6 times P/E and 230% tangible book value. I would keep the company into my watch-list but I would not go long at current prices.
Trading at the Right Price
Brookfield Renewable Energy Partners, which has been very acquisitive during the last few months adding new opportunities to its portfolio, looks now undervalued. The reason to explain the existing overhang on the stock is clearly related to the equity issuance launched in June, which was later pulled given "non-ideal" market conditions. That said, I believe the market shouldn't have reacted against the stock since the issuance was simply planned to build funds in order to increase M&A activity beyond the company's $1 billion current liquidity position.
Brookfield Renewable now offers a very attractive 5.6% distribution yield, above its 5% historical average. Selling for 8.8 times 2013 operating cash flow, I think Brookfield Renewable is a great way to get exposure to a globally diversified source of renewable projects. Moreover, I am not the only one thinking of Brookfield Renewable, successful funds such as the KBI Alternative Energy Strategy are also long on the name.
Eyes Set into the Future
Brookfield Infrastructure, which is also held by Ron Baron, has enviable liquidity. The company's current liquidity position is approximately $2.5 billion, out of which $1.1 billion is cash on a pro forma basis (after the closing of recent transactions). I think the company's value should be measured in terms of its future and the steady deployment of its existent capital.
Brookfield Infrastructure has a number of potentially profitable areas for investment around the world but, above all, in infrastructure hungry Emerging Markets (EM) such as Brazil. According to Credit Suisse analysts, in Brazil, funds can be invested at Funds From Operations (FFO) yields above 12%. Therefore, the company's ability to grow its distribution yield, whether through acquisitions or organically, is critical to evaluate the company's value. Moreover, the currently conservative dividend payout ratio should allow Brookfield Infrastructure to self-finance on going opportunities.
The company has targeted to growth its annual distributions by 3% to 7% with a FFO payout ratio of 70%. Hence, I believe the currently fair 4.75% dividend yield could go as high as 5.5% by the end of 2014. Trading at 11 times its operating cash flow, I think Brookfield Infrastructure is a solid investment for those looking for a good cash yield and EM exposure.
The Brookfield Group of Companies offer a great way to get into different markets in an efficient way. A proven management with a very strict acquisition criteria — they never pay too much — and ample sources of private and public capital make these companies ideal options for portfolios looking for diversification. That said, you should always be wary of not paying too much for the assets you are buying. I believe that Brookfield Renewable Energy Partners and Brookfield Infrastructure are good buys for those looking to get into renewable energy projects or global infrastructure. Brookfield Asset Management looks expensive at this point in time.