Thoughts: - AZJ itself is moderately undervalued right now - 20% or so by my estimation. If I didn't already own it I'd buy it; due to the stable nature of the business it's got a fairly narrow band of plausible valuations. I'm a buyer below $3.70 and a seller above $5 depending on other opportunities. Until then, like @@noomxx very happy to sit back and collect the dividends.
This opportunity has come about largely because the market doesn't like the One Rail acquisition. I don't either particularly, but the amount of value torched isn't (in my view) as much as the market reckons.
- Dividends won't be 30c for AZJ ex ECR. I'd guess not more than 25c until the balance sheet repairs itself, given the extra $1.9bn in debt AZJ carries.
- I think you've overdone the ECR valuation. First, I suspect we'll get a chance to buy it at well less than 12x P/E; AZJ itself has recently been there and it isn't an unwanted spin-off. Second, the $140m "underlying earnings" figure is an EBITDA figure so, for starters, it doesn't include interest on the $500m debt it's going to carry. Macquarie also won't have depressed its earnings before sale and you can see that the preceding two years were significantly lower than 2021:
Source: AZJ Investor Presentation October 2021
AZJ itself trades at EV/EBITDA of around 7.0. If we assume AZJ can do better with ECR than Macquarie and extract $150m EBITDA, applying the same multiple would value ECR's equity at $550m. If we assume a more conservative $120m EBITDA, this puts the equity at a mere $340m.
All very rough I admit, and no one can value ECR properly without thoroughly reviewing its financial history (once that becomes available) and giving some thought to its future prospects.
I do think, though, is that this is the sort of scenario where temporary overhangs in supply of the spun-off company can deliver great opportunities to patient, value-focussed investors to buy good assets at bargain prices.
AZJ Price at posting:
$3.62 Sentiment: Hold Disclosure: Held
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