For years, Brookfield Asset Management has been treated like the Rodney Dangerfield of the stock market. Just as the comic actor didn’t get much respect, neither does Brookfield.
Managers at the Toronto-based company regularly calculate what they figure Brookfield is worth, but the market just scoffs. While management’s latest figure puts Brookfield’s net asset value at $40.99 (U.S.) a share, the stock trades far below that estimate, at around $32.
The discount has persisted for years, but Toronto-based Brookfield is about to make its biggest effort yet to narrow the gap. Investors should take note because there is a decent chance that Brookfield will succeed, leading to a higher stock price.
Brookfield is one of the world’s biggest owners and managers of hard assets, overseeing a $150-billion trove of real estate, infrastructure and renewable power plant assets that spans everything from hydro electric dams in Ontario to railway lines in Australia. The company has previously spun out most of its $37-billion worth of power and infrastructure holdings into two separate, TSX-listed companies. Brookfield maintains a large shareholding in these entities, but also extracts lucrative management fees from them.
The spun-out companies are structured to pay high dividends to attract yield-hungry investors interested in their 5 per cent payouts. Brookfield, however, aims to please investors through capital gains and only has a 1.6 per cent yield.
Now the company’s largest division by far, its $83-billion collection of real estate, is about to receive the spin-out treatment. And therein lies the potential opportunity for investors. The move to create the new venture, to be known as Brookfield Property Partners, could be a catalyst to move the share price higher.
The key is that Brookfield is moving to a business model that depends more upon charging people to manage investments for them, and less upon extracting earnings from its own assets.
One analyst who thinks investors will change their take on Brookfield is Michael Goldberg at Desjardins Capital Markets, who rates the company as a “top pick” based partly on the plans to organize the real estate arm into a limited partnership. “Over time, a rising portion of its growth should come from fees, and the justification for the shares to sell at a premium to [net asset value]should become increasingly compelling,” he wrote in a recent note to clients.
Brookfield announced its intention to create the property venture last month. The company hasn’t fixed a date for its creation, other than to say it will occur this year.
The spin out could goose Brookfield’s stock by giving the company a valuation more in line with conventional money managers. A pure money management firm such as CI Financial trades at a price equal to about 17 times its annual earnings, far loftier than the 11 times earnings that the market pays for Brookfield.
Investors value money managers so highly because the fees that managers charge clients are a dependable source of income. Furthermore, generating those fees doesn’t tie up much capital, doesn’t require high expenses, and isn’t exposed to the risks of actually owning a productive asset.
“[Brookfield’s]long-term history is that of an owner-operator, which over the last number of years has morphed itself into more of an asset management model, ”observes Neil Downey, an analyst at RBC Capital Markets.
Brookfield calculates the value of its tangible, or hard assets, at $34.52 a share, then adds another $6.47 a share to reflect its money management side.
Mr. Goldberg says the creation of Brookfield Property Partners “takes [Brookfield Asset Management]further in the direction of emerging as a true asset manager,” which led him to increase his target price to $40 a share from $37.
Mr. Downey also rates the stock as a buy, with a $37 target price, but is more cautious on the value of the money management franchise. He is willing to give it a value of $2 to $3 per share within his target price, but a year from now when the concept has had more time to prove itself.
“Our view is that we are on the cusp, at the point where investors should be willing to pay something for value-asset management-fee streams,” he says.
Some of Brookfield’s biggest shareholders are buying into the idea that the firm will be able to transform itself into more of a money manager. The company has the “track record to be a very successful asset manager similar to a Blackstone [Group]” says Jason Wolf, co-manager at Third Avenue Real Estate Value Fund in New York.
Brookfield is “very value oriented, looking for large discounts to intrinsic value and that appeals to us,” he says.