B&bpower Loses Faith Of Brokers

Sydney Morning Herald

Saturday June 21, 2008

Danny John

THE credibility of Babcock&Brown Power's management hit rock bottom yesterday just as its share price plumbed new lows, in the wake of a damning response to its decision to wipe out this year's second-half dividend payout and cuts to its present and forthcoming profit expectations.

Investors piled out of the stock as BBP's market-hammered share price dropped to just 59c, a fall of 13c or another 18 per cent - its lowest point since the company was listed on the ASX by Babcock&Brown in a $2.50-a-share flotation 18 months ago.

The company's problems have been compounded by botched disclosures of its debt refinancing difficulties and Thursday's revelations that the weakness of its balance sheet meant that a planned 13c a security final distribution would have to be abandoned.

That news and the prospect of much lower than expected profits next year of $439million earned the wrath of analysts despairing of BBP's immediate earnings performance. They also said planned asset sales would need to raise at least $1billion.

But most of the scathing comments were reserved for BBP's management and board about the way they had handled a series of "bad news" announcements. These have culminated in its shares falling from $2 to yesterday's level in little more than three weeks.

Brokers ABN Amro made the biggest criticism, saying they had lost "what little faith we had in management". The Australian Securities Exchange statement about the distribution had "removed any sliver of credibility the market was giving the company", analysts Jason Mabee and William Allott wrote.

The pair cut their previous "buy" recommendation on the stock to a "hold" and built into their new "scorched earth" target price for the shares, of just 90cents, a management trust discount of 25 per cent.

"BBP's credibility has been completely squashed and we struggle to see the stock re-rating in the immediate future," they added in their note to clients.

Deutsche Bank's analysts had similar doubts: "The company is promoting financial prudence, however we continue to struggle with the consistency of disclosures that this company makes, casting further concerns over management credibility," John Hirjee and Hugh Morgan said.

UBS, Credit Suisse and Merrill Lynch all indicated cutting the dividend made sense in a plan to conserve cash and pay back debt.

However, estimated savings of $95million from axing the dividend were relatively minor to its cash needs of anywhere between $700million and $1.2billion to make debt more manageable, the brokers suggested.