Clouds Gather Over Aurizon

Australia | Feb 14 2017

Brokers brushed aside a robust first half result for Aurizon, instead looking at the issues which cloud the outlook beyond FY17.

-No significant impact on volumes despite improvements in coal and iron ore markets
-Reduced capital expenditure and re-pricing bulk contracts expected to improve confidence
-As additional capital management options are canvassed over time


By Eva Brocklehurst

Bulks and freight haulage business Aurizon ((AZJ)) may have beat many forecasts in its first half result but numerous favourable and non-sustainable items took the gloss off the beat. While there have been improvements across the key commodity markets of coal and iron ore, the company has not yet witnessed a significant impact on volume.

The main benefit of the improved commodity outlook, in Deutsche Bank's view, is that commodity customers are all operating at positive cash margins and this should alleviate some of the pressure. The coal business currently has an average contract life of 10.1 years and new-form contracts account for 96% of volumes.

The network division benefited from higher-than-expected recoveries and around $33m in benefits will not be repeated into the next half. Deutsche Bank forecasts the Aurizon network to deliver operational earnings (EBIT) for FY17 of around $550m but, given the $132m in benefits flowing in that year, FY18 will likely be lower and the broker's current forecast is $505.9m.

At this stage there appears to be some earnings headwinds into FY18 and Deutsche Bank downgrades its recommendation to Hold from Buy, given the shares are now trading at a premium to the broker's $5.10 share price target.

The company remains committed to its transformation program, targeting $380m in savings by FY18. The company has also indicated all investment proposals will be assessed against share buy-backs as a use of capital. Aurizon's network division submitted its draft access undertaking for the regulatory period commencing July 1, 2017, in November (UT5). Further dialogue with the Queensland Competition Authority is expected and a draft response from the regulator is due in the next six months.

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