Aurizon is doing, more or less, what it is meant to do, namely being a reliable cashflow generator, with fairly predictable profit streams…
…acting as an inflation hedge…
…that is set to diversify away from coal, at the margin, towards hauling stuff with a more plausible future, namely the base/bulks/grains business of One Rail.
And using that combination of higher cashflow and higher inflation to reduce the overall debt burden…
Whilst Aurizon is an infrastructure business, with inflation pass throughs, generating infrastructure like margins…
There remains a material difference between what the market is willing to value the underlying assets, and the carrying values…
If you value AZJ at 13x, then future earnings need to grow over time (the dashed line in the below analysis) to generate a “market-like” rate of return of 7%. It would seem, via One Rail, they are set to grow, and so that hurdle is not unduly high.
However, 13x is a very low multiple for infrastructure assets. At 16x, forecast earnings are able to decline (which matches the “coal in decline scenario”) and still generate attractive total returns over the coming decade.
It seems very likely, to our mind, that AZJ should be able to stagger over such a bar of low expectations.
A little like the SUN result earlier today, it is a solid result in a period marked by significant weather, & fairly difficult to manage labour, & (to limited impact) raw material pass-throughs.
The market hasn’t liked either overmuch, but they might look much better, by comparison to others, by the end of reporting season, which should be marred more than ever by supply chain snafu’s, and raw material pricing impacts.
We remain (broadly) happy holders in our direct equity portfolios, on valuation grounds.
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