Babcock Says Profit to Drop 40% as Investments Slump

Date: Monday, August 11, 2008
Author: Stuart Kelly, Bloomberg

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Babcock & Brown Ltd., the worst- performing stock on the MSCI Asia-Pacific Index, said first-half profit dropped as much as 40 percent as share and real estate prices tumbled, eroding the value of investments.

The Australian fund manager's group net income fell between 25 percent and 40 percent in the six months ended June 30, from A$250 million ($222 million) a year earlier, the Sydney-based company said in a statement.

Babcock shares extended a 78 percent slump the company has blamed on short sellers, after Chief Executive Officer Phil Green said volatile markets have made it ``difficult'' to predict earnings. The U.S. subprime collapse has ravaged the value of securities and real estate-linked investments at the nation's financial firms, with Australia & New Zealand Banking Group Ltd. forecasting its biggest profit drop since 1992 and National Australia Bank Ltd. raising provisions fivefold.

``That's a substantial cut, considering the market was expecting earnings-per-share growth in order of 25 percent in the coming year,'' said Paul Xiradis, who manages the equivalent of $11 billion as chief executive officer of Ausbil Dexia Ltd. in Sydney. ``The business model is under a fair bit of pressure and it's difficult for them to grow earnings in this environment. The risks are too great.''

Xiradis sold his Babcock holding during the past year.

Babcock dropped 12 percent to close at A$6.00 in Sydney, its biggest decline in eight weeks. It's the worst-performing stock on the 988-company MSCI Asia-Pacific Index during the past six months.

Debt Strategy

More than A$7 billion has been wiped from the company's market value this year amid concern that its strategy of using debt to buy assets for its funds is failing as credit costs soar. Declining financial markets and wariness of complex corporate structures have cut the value of Babcock's listed investments.

``These listed funds models struggle in this kind of environment,'' said Adnan Kucukalic, a Sydney-based strategist at Credit Suisse Group. ``Investors withhold their cash in this kind of environment, and it's the lifeblood of the model. In cash constrained conditions these models are as good as broken until the cycle turns.''

Babcock & Brown Ltd. makes up 87 percent of Babcock & Brown Group, with U.S. stakeholders that took up shares before the company's initial public offering in 2004 accounting for the rest.

Group full-year earnings, which are expected on Aug. 21, will be below the A$643 million that it reported in 2007, the company said. As recently as May 30 it forecast full-year group profit to increase at least 17 percent to A$750 million.

`Volatile Market'

``The volatile global capital market conditions have made and continue to make business conditions uncertain and forecasting in the short term difficult,'' Green, 53, said in the statement today.

Everest Babcock & Brown, a publicly traded hedge-fund manager that's 28 percent-owned by Babcock, has slumped 64 percent this year. Babcock & Brown Power, Australia's biggest publicly traded power producer, has dropped 79 percent as it scrapped its dividend to focus on repaying debt.

As share declines accelerated this year, Babcock and Allco Finance Group Ltd., which also used debt to buy assets and spin them into funds, blamed short sellers for the plunge and said their businesses were operating as normal. Short sellers sell shares they borrow on expectations prices will fall and they can buy them back at a profit.

Babcock lost more than half its market value during the week ended June 13 amid mounting concern that the company was struggling to reach agreement with its creditors. On June 30, Babcock agreed to a higher interest rate on A$2.8 billion of debt, and banks waived their right to force early repayment as the shares slumped.

Allco in June forecast a full-year loss of A$1.5 billion because the company's assets ``suffered material impairment.'' That would make it the biggest loss by an Australian company since insurer AMP Ltd.'s A$5.5 billion shortfall in 2003.

To contact the reporter for this story: Stuart Kelly in Sydney