Michelle
Introduction
My thesis is that Brookfield (NYSE:BAM) has big plans for the future. I am optimistic that they will deliver on their vision because of the success we have seen from them over the years. To set their sights on perspective, we need to understand how they value the company now and how they think it will change over time. This slide is from their 2022 Investor Day shows that they reward long-term shareholders:
19% Annual Return (2022 Investor Day)
Investor Day Valuation
At the 2022 Investor Day, management said that synergies from the asset manager pillar, the insurance solutions pillar and the capital pillar will accelerate growth. They show that the value of the plan today is $133 to $153 billion and the value of the plan for 2027 is listed as $287 to $325 billion. It is noted that it is $82 to $94 per share now and $175 to $198 per share for 2027. A slide is shown that represents a good scenario for shareholders who hold their shares in the Corporation and Manager:
Plan Value (2022 Investor Day)
The first footnote for the slide above states that the plan amount is based on:
(i) Annualized fee-related income and net generated carried interest, (ii) using a market-based valuation multiple within the range of 25-35x to fee-related income, and 10x multiple to net target carried interest, in each case as adopted by management in its business planning, and (iii) our accumulated unrealized carried interest balance.
The second footnote for the slide above goes beyond the margins:
The value of the asset manager within our Plan Value assumes a 60% and 30% margin of annualized fee revenues and a 70% and 50% margin of gross generated carried interest for Brookfield and Oaktree respectively.
The Manager is shown separately in green on the slide above because of the upcoming special distribution. What I read is that Brookfield’s current parent will be called Corporation and it will trade under the symbol BN. 25% of the asset management business will be distributed to existing shareholders and it will be known as Manager under the symbol of BAM. For every 4 shares of the parent held by the shareholders, 1 share of the Manager will be received. Going forward, the Manager will earn 100% of the fee-related earnings (“FRE”) and it will have 2/3rds of the gross carried interest earned on the new funds.
2Q22 Valuation
Looking at the 2Q22 supplement, we can approach the valuation range used to guide the Investor Day presentation above.
Slide 6 of the 2Q22 supplement shows $1,951 million in FRE such that the valuation of this component with a 25x multiple comes to $49 billion.
We see annualized interest of $2,415 million in the same slide and this valuation comes to $24 billion with a 10x multiple. The net accumulated unrealized carry on slide 17 is $5.4 billion that the asset management valuation is $78.4 billion.
Per slide 7 of the 2Q22 supplement, invested capital, net $51 billion.
Combining asset management and invested capital, the total valuation is $129.4 billion. The $129.4 billion figure was very close to the lower end figure of $133 billion in the Investor Day presentation. I believe the difference may be due to the fact that they now have more recent numbers and there are some new ways of looking at things in the insurance example. The high end of the Investor Day range is $153 billion which is $20 billion more than the low end of their range due to the 35x multiplier on the FRE instead of the 25x multiplier.
In the current environment where interest rates and inflation are on the rise, I am not using management’s FRE multiple range of 25 to 35x. However, I use a multiple of 20x for the high end. This is a difference of about $10 billion with the high end of my valuation being just under $120 billion. The low end of my range is 20% lower so my valuation range is about $96 to $120 billion. The 2Q22 supplement shows 1,638.1 million diluted shares at the end of June so this is a per-share range of about $59 to $73.
Concluding Thoughts
CEO Bruce Flatt’s erudition has been a big part of Brookfield’s success and I am optimistic about the future as long as he remains a part of Brookfield. My valuation range is not as rosy as used by management but even my range is above the September 16th stock price of $48.03. That said, I think BAM stock is undervalued in the long term.
