AZJ 2
So the AZJ result was pretty disappointing.
However, the rain flooding the tracks over the half is a pretty good excuse. AZJ is a decent infrastructure business trading on 12x PE, with near term earnings impacted because it was wet.
It won’t always be wet.
The downgrade to FY23 guidance (4%) was also very disappointing. Equally, as the below details, a 3rd party freight train derailing one of your trains is also somewhat left field and non recurring.
Another important takeaway from the call: the inflation protection that AZJ provides is regulatory, and those inflationary impacts are captured in the WACC resets, here from July onwards. Perhaps a small footnote is that the inflation protection takes time to work its way through the business, which means in the short run you can be exposed (revenue growth < cost growth) but it does catch up.
So, what to make of it all?
Yes, it’ll get the inflation protection. Yes, wet weather impacted the result, but, despite 3 years of La Nina, it will end, and the life of the assets is long.
Yes, train derailments are bad. But they are infrequent. And the success in negotiating sub-inflation outcomes for the enterprise bargaining agreements is a solid achievement.
So, we’ll continue to hold.
Minor chart additions
You can see the bulk business growing, that’s the OneRail acquisition (wheat, non-coal commodities).
You can see the market placing a massive discount to the asset base.
You can see that profits are normally quite stable, and as per our first note (from yesterday) that the massive operating leverage to volume growth (normally an attractive feature!) meant that wet weather impacted volumes of -8% ate all the earnings.
Now, Aurizon does have take or pay type contracts. However, they too (in a similar vein to our points on inflation) take time to recover. You might get nothing in H1, 60% in H2, and 40% in the next year, in terms of network take-or-pay recovery.
Lastly on the cashflows; the below exchange from Justin Barrett (who always makes me think of Tim Barrett) and the CFO indicates free cashflows are expected to return to prior levels even after accounting for growth capex.
Ultimately, I don’t think we need to be too worried about our holding and are inclined rather to top it up.
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