Brokers Slam B&b Warning

Sydney Morning Herald

Wednesday August 13, 2008

Danny John

THE credibility of Babcock & Brown's management has been put on the line, with analysts responding to Monday's shock profit warning by slashing their earnings forecasts and questioning the timing of the downgrade, just before the release of its latest results.

With investors taking another bite out of B&B's share price yesterday in the wake of the expected 25 to 40 per cent drop in first-half profits, brokers indicated the outcome for the full year could be equally bad.

Monday's warning flagged that last year's corresponding six-month result of $250 million would be reduced by as much as $100 million.

Credit Suisse says that may translate into a full-year result of as low as $422 million when the group reports in February.

While B&B would only say in its ASX announcement that its full-year result would "not exceed" last year's $643 million, the consensus of five brokers was that investors should expect little more than a net $500 million.

But the conclusions about the quality of the outcome and the way B&B has dealt with the warning in the run-up to its first-half announcement next week was overwhelmingly negative.

The comments only added to the downbeat sentiment that has swirled around the group since the credit crisis undermined its debt-fuelled business model. That has led to a near-80 per cent drop in its share price since the start of January.

Citi described its revised forecast as "rubbery", given the extent of B&B's asset write-downs and impairment charges, saying the uncertainty reflected "the extent to which the firm's reputational damage could impact future business".

Credit Suisse said B&B's announcement was another "confidence-shattering event" for the group and underscored uncertainties about the value of assets held on its balance sheet.

Merrill Lynch said the write-down was probably imposed by the group's auditors following the closing of the company's books on June 30.

"This will do little to help rebuild management's already fragile credibility, suggesting its current valuation discount is likely to remain," said Merrill.

The only positive to come out of the reports was the view that the profit warning would not lead to a breach of the group's refinancing deal.

That did not prevent B&B's shares falling 19c to to $5.81, following Monday's 80c drop.

© 2008 Sydney Morning Herald

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