Brookfield Asset Management Reports 4Q11

Brookfield Asset Management reported impressive financial and operational performance during 2011. They are well positioned to increase cash flow further and
generate increase value through both organic expansion and new initiatives. Our
investment thesis remains intact. Some specifics:

BAM’s estimated intrinsic value of the business increased to $40.99/share year end
2011 from $37.93/ share the prior quarter and $37.45 for year end 2010 for increases of 8.1% and 9.5% respectively.

A total return for Brookfield shareholders of $3.3 billion (or $5.33 per share) was generated representing a 14% return compared to $2.1 billion or 10% in the prior year.

Tracking the company’s estimated per share intrinsic value and share price against our
estimate of intrinsic value is probably the best way to monitor this investment
overtime. Keep in mind our intrinsic value estimate is higher because we include the value of the franchise.

The margin of safety for shares purchased today is 53% on our estimate of intrinsic
value and to 22.6% on the company’s estimate of value without the franchise value.

A positive surprise was the announced 8% increase in the dividend to 56 cents per year paid quarterly yielding 1.8%. This is a resumption of a policy to increase distributions by an amount that corresponds to the growth in cash flow while ensuring sufficient capital to build equity and strong investment grade ratings. Dividend increases are often considered a sign of management confidence in the future of the company.

The share price was off 16% in 2011 vs. a flat performance from the S&P 500 index. Likely reasons cited by BAM’s management include: economic turmoil in the global financial markets; BAM issuance of shares early in the year; and strong performance of BAM shares in the two preceding years. I agree and look at this as an extension of the time available to buy attractively prices shares.

You may recall BAM is transitioning from a conglomerate to an asset management
company.  Historically conglomerates tend to be undervalued, that is the value of the whole is less than the value of the parts, because they are complex, difficulty to analyze and often contain different asset classes. For example, is BAM a utility, a railroad and terminal company, a real estate company, an asset manager? What if you want to own a
utility and not the other parts, you probably just buy a standalone utility, right?

BAM is addressing this and is in the final stages of implementing their “listed issuer strategy” by creating flagship public entities and private funds deployed in the specific asset classes where they enjoy a distinct competitive advantage. It will become easier for investors and analysts to follow and understand the parts and the true value.

Along this line BAM achieved large milestones: the first step was the listing of Brookfield Infrastructure in 2008; the second step was the merger of our power operations into recently launched Brookfield Renewable Energy Partners completed in 2011.

BAM’s management announced the next step expected in 2012 in their release and
conference call. They hope to achieve the launch of a similar flagship public entity for the property group one of the largest diversified real estate businesses in the world.

Do spinoffs work? Historically the can work very well. Indications are BAM’s efforts here are already showing great results and from CEO Bruce Flatt’s shareholder letter: “Furthermore, our two flagship spin-off entities, Brookfield Infrastructure Partners and Brookfield Renewable Energy Partners, achieved returns well in excess of 20% over the past three years by building portfolios of long duration assets with strong cash flows. Notwithstanding this performance, we see significant upside for both of these entities going forward.”

Bruce Flatt’s and BAM’s management determination is reflected in his discussion of
the future: “Lastly, and maybe most importantly, in five to 10 years we believe that our asset management operations will mature to a point that if its intrinsic value is not reflected in the share price, we will be able to separate this business from our real
assets to ensure the values are surfaced. Of course, this value may be recognized in the stock market as more investors better understand our strategies, but we will always have the option to take steps to sell assets and repurchase shares, or spin-off assets to shareholders in order to surface value.”

I encourage you to read CEO’s Bruce Flatt’s letter to shareholders in its entirety. Brookfield’s management is among the best in the business and like Warren Buffett’s
shareholder letters a great source of investment wisdom in a well thought out manner.
You can download the letter and the other quarterly release information here.

Disclosures:

I am long BAM, BIP, BREP.

The information contained herein is provided for informational purposes only, is
not comprehensive, does not contain important disclosures and risk factors associated with investments, and is subject to change without notice. The author is not responsible for the accuracy, completeness or lack thereof of information, nor has the author verified information from third parties which may be relied upon. The information does not take into account the particular investment objectives or financial circumstances of any specific person or organization which may view it. The author is not a registered investment advisor and does not represent the information as a recommendation for readers to buy or sell the securities under discussion. Nothing contained within may be
considered an offer or a solicitation to purchase or sell any particular financial instrument. All liability for the content of this information, including any omissions, inaccuracies, errors, or misstatements is expressly disclaimed. Always complete your own due diligence. Before making any investment, investors are advised to review such investment thoroughly and carefully with their financial, legal and tax advisors to determine whether it is suitable for them.

 

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