AJX in Transition

A little story for a quiet Sunday afternoon.

Too many years ago, when I was young and naïve and new to the investment business, I remember sitting watching cricket with a mentor when the topic of a fledgling company that we both held shares in arose. Its potentially disruptive business had been a darling of the financial media (no internet chat rooms then) and its share price had risen consistently based on its perceived future.

I commented that, with the expected announcement of its first major sales contract not far off, we should soon see another good jump in its share price. His unexpected but typical response was my first unorthodox investing lesson.

“The last thing we want is for them to make a profit. The market will start valuing them then.”

Indeed, with announcements of a series of sales contracts over the following year or two the share price slowly drifted down, until a balance eventually was reached between its market value and its revenue-derived fundamental value. It proceeded to climb from that point as those revenues continued to grow.

I see many parallels here with AJX, which should be interpreted as my opinion.

Its earnings potential, initially through supply of FR to military markets, was intentionally spruiked to raise the share price, arguably with the sole aim of obtaining an early trade sale at a premium, and HC was used as a support vehicle for this purpose.

But the capabilities of its scientific staff changed this plan. With the development of some innovative chemistries the Company found itself in a position to satisfy large commercial markets at very competitive prices, and its potential fundamental value suddenly appeared to be much higher than could be generated by spruiking the military market. The potential to be a major player in the industry rather than just a takeover target was recognised, and the business plan altered accordingly. The chairman’s regular on-market purchases I think demonstrate this recognition.

As I see it AJX is near the end of that transition to a share price determined solely by fundamental value. With annual revenue currently somewhere around the $25M to 30M level its market cap represents a fairly conservative price/revenue ratio of 4. Indications are that from here those revenues will grow at a rate well above the norm.

There is nothing unusual about its share price pattern for any company moving through the transition that I’ve described or through a change in business plan. A good example is MLB (below), although many other examples easily may be found.



This chart pattern may be compared to that shown in the charts produced regularly by ARMCH for AJX. For me it is obvious where AJX currently fits in this pattern, both technically and fundamentally, and this is the reason for the sentiment indicated. Such an analysis is not influenced by the contagious noise, spruiking or whinging, that infects AJX’s HC threads, although the latter probably has influenced the pattern's timing.

And so, everyone lived happily ever after (IMO).