A Financial Jack-of-all-trades

Before we delve into the various capital operations of Brookfield Corporation, it is important to understand the core businesses of the company. Brookfield Corporation's operations are built around three pillars:

Asset Management ($586B AUM): Asset Management is further divided into several categories including real estate, private equity and infrastructure. Originally known for its real estate investments, Brookfield Corporation has developed a solid reputation in other asset classes in recent years. Asset management is, if done on a large scale, an extremely juicy, non-capital intensive and highly profitable business. Insurance ($41B AUM): Brookfield Corporation also offers life insurance, annuities and unemployment insurance. Credit ($121B AUM): After taking a significant stake in OakTree in 2019, Brookfield Corporation now operates in the credit market in association with one of the most reputable companies in this market.

An exemplary restructuring

The work mentioned in the introduction has already been underway for several months. On December 12, Brookfield Asset Management (NYSE: BN, TSX: BN), the former holding company, was renamed Brookfield Corporation. At the same time, 25% of Brookfield Corporation's asset management business was spun off before going public under the name Brookfield Asset Management (NYSE: BAM, TSX: BAM). Brookfield Asset Management will receive one-quarter of the management fees and two-thirds of the performance fees, with the remainder going to Brookfield Corporation. The main objective of this transaction is to increase the value of Brookfield Corporation shares by more accurately valuing the asset management part of the group. A mission that has already borne fruit - at least in part - as we shall see.

Before the spin-off, the asset management business was valued at around 8 to 9 times book profits. Management felt - probably rightly - that this was an unfairly low multiple for a recurring, highly profitable and growing business. According to Bruce Flatt himself, the business should be valued between 25 and 35 times profits. A very high multiple, but one that might be achievable in a more attractive market environment. All the more so when one knows the quality of the Brookfield franchise in the asset management world.

After the spin-off, i.e. today, Brookfield Asset Management's capitalization is $10.5 billion. Knowing that the asset management business generates $2 billion in management fees at run rate, should grow by 15 to 20% per year and that Brookfield Asset Management recovers 25% of this flow, this represents approximately $500 million in annual profits excluding growth.

The current valuation of Brookfield Asset Management is therefore only 21 times profits, knowing that neither revenue growth nor outperformance fees are included in this rapid valuation. This could add up to a few hundred million dollars in revenue.

Returning to Brookfield Corporation - the "remainco" - the holding company of the group owns $53 billion in assets net of debt and 75% of the asset management business. These $53 billion in assets are primarily strategic infrastructure (dams, power grids, highway bridges, etc.) and ultra-prime real estate. A large part of these assets are held in partnerships (BEP, BIP, BBU) that are also listed on the stock exchange and pay nearly $3.3 billion in annual dividends to Brookfield Corporation.

Finally, one of the unique features of the group, which is undoubtedly at the root of the firm's success, is that a large portion of the company's equity is invested alongside that of its clients, thereby aligning shareholder-client interests. It is also important to note that the management owns 20% of the capital, also ensuring an alignment of management - shareholder interests. Another important point is that about 80% of Brookfield's assets under management are locked in for the long term (minimum 10 years) and therefore much less risky than those of asset managers such as BlackRock or T.Rowe, which are generally invested in listed securities and therefore very vulnerable to outflows. A subject that has been making headlines in the specialized press lately...

The valuation aspect

If we try to play the dangerous game of valuation, we can first estimate a price range for Brookfield Asset Management. If we value the company at multiples estimated "correct" by the management, i.e. 25 to 35 times the profits, the 25% of Brookfield Asset Management should be between 12.5 and 17.5 billion dollars. The current valuation is therefore relatively attractive, especially since the current dividend yield adds a small bonus (~1.75%). An additional argument is that Brookfield Asset Management is committed to distributing 90% of its profits as a dividend.

For Brookfield Corporation, the valuation is a little more complex because the company includes many entities, each more unique than the other.

We will therefore not venture into a perilous valuation BUT, for once, some banks have built simplified models that we think are interesting to present - see below

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BMO - Bank of Montreal Equity Model BN

In this simplistic model, the target price is $49.00, well above current prices. Still, as you probably know, analyst estimates are not always accurate. We therefore advise you to use this model more as a support for further reflection than as a buying argument. Especially since we believe there is a more attractive risk/return ratio on Brookfield Asset Management, which represents a great opportunity to benefit from the growth prospects of one of the world's best asset managers.