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Strategies & Market Trends : Value Investing
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To: Michael Burry who wrote (7527)6/10/1999 10:14:00 AM
From: Mike 2.0   of 78676
 
Mike and all, I took a small position today in Azurix (AZX), an IPO spinoff from Enron. AZX operates water & wastewater systems worldwide and plans on being acquisitive. AZX becomes a US-based play on water utility consolidation (Vivendi of France is another I have looked at but has no ADR).

If you look at AZX's S-1 filing you'll see Wessex (UK-based operation) incurred a "one-time" windfall tax. It makes pro-forma earnings look much smaller than the "true" run rate. If you take $19 IPO price / .78 proforma EPS, you get a trailing PE of 24, which is sky-high. However, if you add back the $162M windfall tax, PE suddenly becomes 10-11! The prospectus I believe says UK govt would have to enact further legislation to levy another windfall tax. While I won't bet my life the House of Lords won't exact another pound (I mean kilo :-) of flesh from Wessex sometime in the future, this should not be factored in as an annual event.

I think an eventual PE of 18 or so, in line with other acquisitive water utilities such as AWK or PSC is not unreasonable. I have no idea where this will go short term, so I took a small position at 19 7/16 and will leg into a full position if this moves lower short term. Seems like a rare true-value IPO right out of the chute.
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