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Treasure Chest: Aurizon, ESG Victim

Treasure Chest | Dec 14 2021


FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. JP Morgan initiates coverage of Aurizon Holdings with an Underweight rating.

By Greg Peel

Whose Idea Is It?

JP Morgan.

The subject:

Queensland rail haulage operator Aurizon Holdings ((AZJ)).

More info:

While 2021 will be remembered as being the second year of covid, it is also the year the world started to get serious about climate change. COP26 disappointed many in its short-comings, but the investment world has already been shifting its focus away from anything to do with fossil fuels.

This is not necessarily an altruistic move on behalf of fund managers, rather a response to investors themselves shifting rapidly to an ESG preference. ESG has been around for a long time, but only this year have we really seen investors taking notice, not just because they want to see climate action but because ESG investors are being rewarded.

Arguably the most targeted commodity on this basis is thermal coal, used to fire electricity generation. It is to that end rail hauler Aurizon Holdings has attempted to reduce its exposure to thermal coal and increase exposure to “bulks”, which can be anything from iron ore to lithium – the latter right up the ESG scale.

To this end Aurizon has acquired bulk hauler One Rail, before it has completed a planned sale of its thermal coal hauler East Coast Rail. JP Morgan is uneasy about the timing.

The price Aurizon paid for One Rail is not unreasonable, the broker suggests, but what price can Aurizon rely on for its on-the-nose thermal coal business?

On the investor abandonment of thermal coal, Aurizon is trading at a -25% discount to the ASX200, when historically having commanded a 10% premium, JP Morgan notes. This might suggest Aurizon is currently good value for investors, but the broker believes such a valuation discount will now be the norm given ongoing thermal coal exposure.

To that end JP Morgan initiates coverage of Aurizon with an Underweight rating and $3.10 target (last trade $3.34).

This translates into Ord Minnett initiating with a Lighten rating, as the latter “white labels” JP Morgan research.

Elsewhere on the FNArena broker database, Macquarie and Credit Suisse are both advising so they are currently restricted. Morgan Stanley has an Underweight rating and Citi and UBS are both on Neutral.

Only Morgans has a Buy equivalent (Add), citing the aforementioned discount to market. The consensus target is $3.59.

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