Babcock & Brown Wind (or lack of it)

I went for a bike ride this morning.  Conditions were perfect…sunny and plenty of interannual variability.  That apparently is the new euphemism for no wind according to the management team at Babcock & Brown Wind, the listed windfarm satellite of Babcock & Brown (ticker BBW).  It basically means buggered if I know what happened to the wind but I’d be amazed if this happens again next year.

This is an excellent stock that suffers just one problem…no wind.  Not ideal for a wind farm operator.  Management is still very happy to stick with P50 (ie. an estimated wind yield that is expected to be exceeded at least 50% of the time…in the last 7 quarters BBW hasn’t).  Regional diversification should go some way in rectifying the issue.  You see, 75% of the latest result’s shortfall was caused by wind and 75% of that came from the Spanish portfolio.  So far this year, BBW’s regional exposure has risen from 6 to 11 regions.  To put that into context, Spain’s representation of the group portfolio has fallen from 30% to 13%.

While BBW will see over $200m from the Alinta deal and came to the market back in April, they will have again tap the equity market when they exercise the right to pick up the balance of Enersis.  In the meantime, there are still plenty of acquisition opportunities given the fragmented nature of the industry.  The top 4 players hold about 20% with the rest made up of small operators like German dentists who may have just 2 turbines to milk tax benefits.

BBW is trading at a significant discount to the only other listed pure wind play, France’s Energie Nouvelle.  There is also another player nearing its IPO, Spanish player Iberenova.  That too is being priced at a significant premium to BBW despite the fact that BBW actually has a significant development pipeline (so strong in fact that they can’t even consider massive markets like India or China given the opportunities still available in the OECD).  

European investors understand windfarms.  They have been using them for 20 years and they now represent about 6% of Germany’s power use.  In Australia, wind power is still in its infancy and accounts for only 1% of all power generation.

So regardless of whether the wind blows or not, there is enough conservatism in the guidance to ensure that the distribution is protected.  That’s an 8.5% yield…and that’s not blowing in the wind…

Telstra is a Sell

Coles-Myer (before and after the split) was and still is the worst retailer in the country saved only by the grace of scale.  Before selling off the Myer business to private equity, Coles-Myer traded off its glory days when it could boast attracting 20c cents of every retail dollar spent in Australia.  The problems that Coles currently has in selling itself are reflective of its ability as a retailer.

Telstra is arguably the worst telco in Australia saved too, only by the grace of scale and infrastructure, a legacy from when it was a government-owned entity.  It is the country’s incumbent telco.  A powerhouse whose share in the broadband market is growing despite having the worst offers on the market.  It defies belief that to report a faulty modem I had to wait cumulatively over 3 hours on hold over 3 days before being sent another modem that was equally faulty.  A visit to the Telstra stores with the faulty product seeking a replacement was met with a curt, “We can’t do that.  You’ll have to do it via the phone”.  ‘That’s half my problem!’ I thought.  The kicker was when I finally got through to Telstra to cancel my broadband account I had to call back because their systems were down.

Telstra is a sell.  The result has come and gone and management failed to provide the surprise the market as expected…From here on in you have nothing more than headwinds: In November the capital gains tax for the instalment receipts halves; In May 2008 the second instalment is payable, and; there is about another 18 months of uncertainty re a decision on Fibre To The Node (FTTN).  If I wouldn’t use them for my own purposes, why would I invest in them?