Ann: Half Year Results Analyst Presentation, page-9

I’m really worried about this stock, my buy-in price is $4.945 only a couple weeks ago which I thought was a decent entry price based on fundamentals and recent highs/lows. Since then every day it’s been sold down heavily for some reason and continues to make fresh 52 week lows every day. I have a substantial amount invested, should I be very worried or is the long term secure?

@huninni,

While I'm not qualified to advise you on how to invest or in what specific shares to invest, I will offer the following generic feedback:

1. You shouldn't own shares if it causes you to worry about them. Especially if the share price wobbles by 5% or 6% just a few weeks later concerns you.

2. You shouldn't have a "substantial amount" invested in something in which you don't have a very high level of conviction (which, reading your post, it appears that you don't).

3. You should ask yourself what you are looking for from an investment that you make. And in that context, you should ask yourself whether the nature of the investment you make meets your objectives. For example, if you are looking for long-run capital gains, ask yourself if AZJ is the sort of company that is able to deliver those capital gains over time.

This requires defining:

1. the nature of the beast, and
2. the way it is valued by the market:

Starting with Point 1.

In AZJ's case, it is a part-regulated, open-access monopoly (the railway tracks) and part-utility (i.e, the trains and wagons that run on top of the the railway tracks).

Starting with the below-ground rail infrastructure: a regulator dictates to AZJ what it can charge for those assets. While it does so in a manner that is moderately attractive to AZJ in terms of Return on Capital, it means that AZJ can't charge what it wants for the use of those assets.

Clearly, this has some limiting implications for the ability to indefinitely grow revenues generated by AZJ's rail infrastructure.

Now consider the above rail assets: AZJ's customer baseis relatively concentrated and confined to major global mining companies (BHP,RIO, Glencore, Anglo American). Those gorilla customers make it very difficult for AZJ to raise prices as it pleases . Also, the growth characteristics of the market AZJ services: deeply cyclical, punctuated by booms and busts.


The above characteristics should suggest to you that the scope for AZJ's revenue line to grow at a fast rate over time is quite limited (modest volume growth + modest price growth).

So if the company's top line is not going anywhere fast, to grow the bottom line requires cost reductions. And this has been happening since the privatisation of the business in 2011.

But, while there is always a lot of fat that can be cut out of a business that emerges from government ownership, there is only so much that can be done before most of the juice is squeezed out of the operating cost lemon.

And then what you have is a low-growth, regulated monopoly/utility (i.e., stable, but somewhat static, earnings).

So, if the earnings aren't growing much, the only way for the stock price to go up appreciably is if its valuation multiple expands.

Which segues neatly into Point 2: how the market values such a company.

Effectively, what we have here is a company which has a balance sheet which is in pristine conditions, and is a highly cash-generative business, with stable, predictable surplus cash flows. But those surplus cash flows aren't increasing much over time.

Definitionally then, in my mind, AZJ is a fixed income stock, or a bond proxy.

And when bond yields are low, AZJ's price will be elevated.
Conversely, when bond yields rise, it means that bond prices are falling. And bond-lookalikes will also fall in value too.

So for someone who is looking for capital gains out of an investment in AZJ, this requires having a firm view of where interest rates, and therefor bond markets, are heading. Because that is what will impact the valuation multiple for the stock.

Alternatively, if you view AZJ as an investment from which to derive an income stream - like I largely do - then whatever the bond market does (and hence, AZJ's share price) should be of little consequence to you.

But I'm guessing you are not an investor merely seeking a relatively secure source of income.