Aurizon Holdings Limited

Company Overview:  Aurizon Holdings Limited (ASX: AZJ) is a leading rail freight operator in Australia that connects miners, primary producers, and industry with international and domestic markets. The company has three operating segments – Network, Coal, and Bulk. Under its Coal segment, AZJ transports coal from mines in Queensland and New South Wales to end customers and ports. Under its Network segment, AZJ is involved in the provision of access to, and operation of, the Central Queensland Coal Network (CQCN). Under its Bulk segment, the company transports bulk mineral commodities, agricultural products, mining, and industrial inputs to its customers. 

AZJ Details

2021 AGM Highlights: AZJ held its 2021 Annual General Meeting (AGM) on 12^th October 2021, wherein the management highlighted that during FY21, AZJ performed resiliently and delivered EBIT of $903 million, which is at the upper end of the FY21 guidance range of $870 - $910 million. Some of the key points highlighted by the management are as follows:

• Improved Performance by Bulk Business: Due to new contracts and higher volumes from existing customers, EBITDA of AZJ’s Bulk business grew by 27% YoY to $140 million in FY21.
• Completed the Sale of the Acacia Ridge Terminal: During FY21, AZJ completed the sale of the Acacia Ridge Terminal in Queensland, which finalised the company’s planned exit from the loss-making Intermodal business.
• Climate Strategy: In order to reduce carbon emissions, AZJ is focused on developing low-carbon technologies for freight locomotives that use diesel fuel.

Key Takeaways of FY21 Results:

• Slight Reduction in Revenue: For FY21, AZJ’s total revenue stood at $3,019.3 million, down by 1% on the previous year, mainly due to reductions in the revenue from Coal business partially offset by continued Bulk growth and WIRP fee commencement in Network.
• Rise in EBITDA: For FY21, the company reported EBITDA of $1,482.2 million, up 1% on pcp, driven by the higher revenue from the commencement of Wiggins Island Rail Project (WIRP) and higher revenue through new contracts in the bulk segment.
• Rise in Free Cashflow: The company’s free cash flow (continuing and discontinued operations) increased by 1% YoY to $734.4 million in FY21.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 77.1%, up from 74.5% in FY20. Net margin for FY21 stood at 20.2%, up from 19.8%. ROE for FY21 stood at 14.1%, up from 13.4%  in FY20. Current ratio for FY21 stood at 1.13x, up from 0.49x, demonstrating that the company has improved its ability to pay short-term obligations.

Liquidity Profile and Gross Margin Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 24.56% of the total shareholding, while the top four constitutes the maximum holding. BlackRock Institutional Trust Company, N.A. and First Sentier Investors Global Listed Infrastructure are holding a maximum stake in the company at 3.89%  and 3.35%, respectively, as also highlighted in the chart below:    

(Source: Analysis by Kalkine Group)

Transformative Acquisition of One Rail Australia: In line with its strategy of growing Bulk business, AZJ recently announced a transformative acquisition of One Rail Australia. On 22 October 2021, the company announced that it had inked an agreement with Macquarie Asset Management to acquire 100% of One Rail Australia (ORA), which comprises bulk rail haulage and general freight assets in South Australia (SA) and the Northern Territory (NT).

• The cash consideration for the acquisition is $2.35 billion, which is expected to be funded from AZJ’s existing resources and underwritten new committed debt facilities.
• This acquisition will allow AZJ to expand into South Australia and Northern Territory and increase its exposure to commodities associated with new economy markets.
• The acquisition is expected to be completed between January 2022 – April 2022, subject to regulatory approvals and several customary conditions.

Decent Dividend Paying History: For H2FY21, AZJ has paid a final dividend of 14.4 cents per share (70% franked), taking the total FY21 dividend to 28.8 cents per share (70% franked), up 5% on the last year. FY21 was the sixth consecutive year in which AZJ has paid dividends based on 100% of net profit after tax. From FY17 to FY21, the company’s total dividend has grown at a CAGR of 6.37%, demonstrating the company’s focus on rewarding shareholders via dividends. At the CMP of $3.43, the company’s annual dividend yield stood at 8.34%, higher than 5-year average dividend yield of 5.64%.

Dividend Trend (Source: Analysis by Kalkine Group)

Change of Director’s Interest: On 4 November 2021, one of its Directors, Timothy Poole, who holds an indirect interest in the company, acquired 45,000 ordinary shares for a total consideration of $153,000.

Key Risks:

• COVID-19 Uncertainties: The demand for commodities in the export markets may get impacted by the COVID-19 pandemic, which could reduce the company’s profitability.
• Geopolitical Risk: Uncertainties regarding the Australia’s trade relationship with China could impact Australian coal and other bulk commodity exports to China.

Outlook: Looking ahead, the company is focused on maintaining its current BBB+ / Baa1 credit rating. The acquisition of ORA is expected to help AZJ in growing its Bulk freight business into new markets and new geographies in Australia.  Following the completion of ORA acquisition, AZJ plans to divest ORA’s NSW and Qld business, East Coast Rail and will retain and integrate the ORA bulk and general freight assets into the Aurizon business. For FY22, AZJ expects its EBITDA to be in the range of $1,425 million  - $1,500 million and sustaining capex to be between $475 million - $525 million.  The company intends to maintain its dividend policy at 70-100% of underlying NPAT. Over the next 1 -2 years, the company expects the dividends to be at the lower end of the range, subject to the divestment option undertaken for East Coast Rail.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 14.24% and is currently trading lower than the average 52-week price level band of $3.37 - $4.44. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering risks related to the fluctuations in the demand for coal and the uncertainties surrounding the impact of COVID-19 pandemic. For the purpose of valuation, peers such as Qube Holdings Ltd (ASX: QUB), Camplify Holdings Ltd (ASX: CHL), Dalrymple Bay Infrastructure Ltd (ASX: DBI), have been considered. Considering the expected benefits from the acquisition of ORA, decent growth in Bulk business during FY21, track record of paying decent dividends, modest long-term outlook, current trading level and indicative upside in valuation, we give a “Buy” rating on the stock at the current market price of $3.43, down by 0.58% as on 11 November 2021.  

AZJ Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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