The future of AZJ, page-16

Interesting company, anyone have any view regarding long-term growth prospects for this company? I'm new and keen to learn. So far looks like it was terrible capital allocation decision with all those share-buy backs, buying $1 for more than it worth, imo they should've stopped it when the share price kept falling because obviously it doesn't appear to be working.

@ReXXar

I am a relatively new shareholder in this Company, and I did outline my investment rationale for it a few weeks ago (see link below):

https://hotcopper.com.au/posts/49024444/single

In a nutshell, I see AZJ as a business capable of sustainably generating surplus capital through the economic cycle, at a rate that compares very favourably to its Market Cap, in the current and prospective yield environment.

In reply to your comment about the “terrible capital allocation decision” to buy back shares 1$ above the current SP, I would make the following remarks:

a) Good capital management does not consist in correctly timing the market, but (among other things) in deploying surplus capital for the re-purchase of one’s shares when those are trading at a suitable discount to fair value; or, differently put, when their market-implied yield offers a suitable premium to their “fair” yield (the latter being defined as the yield that adequately, but not excessively, compensates shareholders for the equity risk taken through the economic cycle relative to low-risk fixed-income instruments).

b) At a SP of 4.90$ (i.e. 1$ above today’s price), AZJ would be valued at an EV/EBITDA of ~8.6x, with a FCF yield on Market Cap of ~7.8% pa and an unlevered FCF yield on EV of ~6.4% pa; relative to the level of long-term government bond yields (and of long-term IG corporate bonds) observed over the period when the buy-back occurred, that looks to me like a more-than-suitable equity risk premium, for a semi-monopoly infrastructure business. In other words, had I been a shareholder back then, and had I been paid 100% of surplus capital in dividends, I would have certainly contemplated re-investing at least part of that payout into the Company’s shares.

On that basis, I would not crucify Management for buying back stock well above the market bottom, as that is not reflective of what the Company is intrinsically worth. Of course, at today’s SP of 3.90$ (corresponding to an EV/EBITDA of ~7.4x, a FCF yield on Market Cap of ~9.8% pa and an unlevered FCF yield on EV of ~7.5% pa) the risk/reward is even better. For what it’s worth, I have topped up my holding this morning.

Cheers