CA - Brookfield: Significant Stock Surge Isn't An Overreaction

2023-12-06 12:30:00 ET

Summary

• Brookfield Asset Management has a well-diversified business model and has raised significant funding, with $865B in assets under management.
• The company expects to raise a record $150B in capital by the end of 2023, with the potential for substantial dividend growth in 2024.
• Brookfield's five pillars of growth position it well for long-term opportunities, augmented by its market-leading scale and competitive advantages.
• I argue why the surge and recovery in November didn't surprise me. It's well-deserved, and dip-buyers who added aggressively have been well-rewarded.
• I highlight why caution is encouraged at the current levels. Despite that, a welcomed pullback could improve the entry point for investors waiting to add more exposure.

I last updated investors in the leading alternative asset manager Brookfield Asset Management Ltd. ( BAM ) in late September 2023, before BAM took a significant tumble in October, falling to the $28 level.

I highlighted that the company's well-diversified business model positions the company to succeed in the current environment. Brookfield's robust business model is bolstered by a largely long-term capital pool, underpinning strategies designed to seize opportunities across various themes and market conditions.

Accordingly, Brookfield has continued to raise significant funding as its AUM reached $865B in FQ3. Its fee-bearing capital has remained stable, providing clarity and visibility into its distributable earnings. Such clarity is vital for BAM investors as the asset manager is committed to a payout ratio of at least 90% to its holders (through dividends and repurchases).

Brookfield generated distributable earnings of $568M in Q3, of which $565M was attributed to fee-related earnings. The asset manager expects to raise a record $150B in capital by the end of 2023, "with 80% of that capital generating fees on committed capital." Management stressed that it anticipates FY24 to be a "potential step-change year in terms of dividend growth and distributable earnings." As a result, Brookfield highlights that "dividend growth for 2024 could be substantial," raising investor expectations of a significant upgrade.

I gleaned that Brookfield's five pillars of growth are well-positioned to capitalize on the short- and long-term opportunities. It's a significant player in the credit space, augmented by Oaktree's market-leading lending strategies and experience. In addition, the private credit space has also outperformed the private equity space lately, auguring well for Brookfield.

Accordingly, its credit portfolio is the most significant piece in its well-diversified portfolio, accounting for $153B of its fee-bearing capital. Brookfield expects this segment to continue benefiting from the surge in investor interest, anticipating an organic growth of "the credit platform's fee-bearing capital from the current level to over $300 billion in the next five years." Its private credit strategy will be undergirded by the growth of its insurance solutions business, which is expected to hit "$200 billion over the same period."

Furthermore, the company also has substantial exposure in the real estate and infrastructure space. As a result, Brookfield sees significant lending opportunities for CRE borrowers seeking refinancing as traditional bank lenders pull back, given the recent banking crisis and potential regulatory changes. In addition, the asset manager also possesses "end-to-end capabilities in digital infrastructure, including data tower transmission, fiber, and data center storage."

As a result, it can benefit from the AI boost, with management stressing that "AI is in its early stages." Coupled with the relatively smaller segments in renewable energy and private equity, Brookfield offers investors an opportunity to partake in several growth themes in a large-scale asset manager with significant experience and competitive advantages.

As a result, I'm not surprised that BAM dip buyers returned aggressively in early November 2023, forming an astute bear trap or false downside breakdown ( see price action glossary ) in its price action.

However, the significant surge over the past month has likely captured most of the potential near-term upside as BAM closed in and re-tested its $36 resistance zone. That zone has remained in place since February 2023, suggesting profit-taking and more intense selling pressure could follow (but it's not validated yet).

Despite the possibility of a near-term pullback, I don't expect BAM to fall back toward the lows seen in November 2023. Investors should be assured of management's confidence in a much improved 2024. In addition, the expected peak in the Fed's hiking regime should provide much-needed relief for BAM's forward dividend yield, normalized to 3.9% with the recent stock surge.

As a result, I see the current entry level as much more well-balanced with a bias toward a welcomed pullback, possibly providing another more attractive entry point for investors.

Rating: Downgraded to Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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