In a recent article here at SeekingAlpha, I laid out an investment thesis for Brookfield Asset Management (NYSE:BAM) focusing on the qualitative aspects of the business. Now I would like to lay out the investment thesis focusing on the quantitative aspects.
Brookfield is objectively cheap based on a sum of parts valuation. The company is comprised of a sprawling portfolio of investments of which 12 are currently publicly traded entities, one more which will be public shortly, and the actual asset management business.
If you add up BAM's ownership interests in the publicly traded holdings, the combined market value is around $22 Billion, compared to the holding company's current market cap of about $22 Billion. Which still leaves the rest of the company. So what else does owning BAM buy you? The two parts will we look into are the soon to be spun-off Brookfield Property Partners (NYSE:BPY) and the asset management business, also called Brookfield Capital Partners.
On April 15th, Brookfield plans to distribute shares of Brookfield Property Partners to existing shareholders as special dividend units. Under the arrangement, shareholders will receive 7.5% of the company while BAM will retain the other 92.5%. The parent company has already announced that they are targeting an annual dividend policy for the new entity at an 80% pay-out ratio, or $1 per share in the first year. If valued like its peers, the new BPY should trade around $25 per share, or a market cap of $11.4 Billion. This estimated value is derived by assuming a 4% dividend yield, and one times price to book value (based on IFRS accounting reported by BAM in the most recent annual report).
Adding the value of this part of the stub back to the value of the publicly traded holdings gives us an implied value of about $34 Billion, versus the current market cap of $22 Billion, and we still have one more piece of the pie to consider.
BAM's management assigns a franchise value for the asset management business of about $4.3 billion based on assumptions of AUM growth of about 10% per year, 1.5% gross margins, and a 15% discount rate. That's very generous of them.
We will attempt to value the asset management business using cash flow yield based off of fee income from management and performance bonuses minus transaction costs. This is an attempt on my part to avoid double counting the many publicly listed assets that are also held by the asset management segment. Applying a 10x multiple to the two-year average fee generation of about $410 million gives a rough value of $4.1 billion for the asset management business. The 10x multiple implies a cash flow yield of 10%, which is in line with the average free cash flow yield on asset managers like Waddell & Reed (NYSE:WDR), and Legg Mason (NYSE:LM). While fee income is a far from perfect comp to free cash flow, it may be reasonable to use this measure as a proxy to cash flow as a backup to management's stated value given the lack of full disclosure on how management arrives at its $4.3 billion asset management franchise valuation. At any rate, we arrived at a number which is fairly close to the supposed intrinsic valuation.
So if we take this assumption and add it back to our previous ones, we have an implied value of about $38 Billion for the whole company. At the current market cap of $22 Billion, that's about 70% upside if the parent company were to trade up to our estimate of net asset value. That strikes me as quite a bargain.
Shares held or
% of ownership stake
(rounded in Billions)
Brookfield Office Property (NYSE:BPO)
Brookfield Residential Properties (NYSE:BRP)
Brookfield Infrastructure (NYSE:BIP)
Brookfield Real Estate Services (BRE.CN)
Brookfield Renewable Energy (BRPFF)
Brookfield Incorporacoes (BISA3.BR)
General Growth Properties (NYSE:GGP)
Howard Hughes (NYSE:HHC)
Rouse Properties (NYSE:RSE)
Acadian Timber (ADN)
Western Forest Products (WEF.CN)
Brookfield Property Partners (BPY) *pending spin-off*
Brookfield Capital Partners
(the asset management business) *my assumptions*
Implied discount to NAV
Please take into consideration that the numbers in the table above are not exact. The point of this exercise was simply to demonstrate the implied discount. The exact percentage will fluctuate with market prices throughout the day. Regardless, BAM is trading for a demonstrable discount to its parts.