Aurizon is a stock we own in our direct equity portfolios. It is a yield play, and we’ve viewed it (like many others) as oversold due to ESG concerns (investors just won’t touch anything that is, in some way, a coal derivative).

AZJ could just keep paying out dividends (eventually investors have to confront the reality of cashflows), and buying back shares, but they are also mindful that cheap debt permits M&A to accelerate their own transition away from coal haulage dependency.

The One Rail assets come with coal, and so AZJ will have to divest away those assets (which it has committed to doing, if it didn’t, exposure would increase rather than decrease). The overall acquisition multiple of ~10x EV/EBITDA is reasonable, for the current environment, and generally in-line with comparatively recent transactions in the space.

Our thoughts

We like the deal. Consistent with previously stated strategy (increasing exposure to non-coal commodities) at a reasonable price, largely debt funded (which, in an environment where real borrowing costs are low, is okay to our mind, and, AZJ also generates stable, predictable revenue and earnings streams with which to service the debt).

Given AZJ’s attractive valuation, we will remain happy holders in our direct equity portfolios.

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