Trouble On The Aurizon

Australia | Aug 10 2022

This story features AURIZON HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: AZJ

An in-line result from Aurizon Holdings was somewhat overshadowed by guidance for FY23 that has largely disappointed the brokers.

-Aurizon Holdings delivered an in-line full year result, with a miss from Bulk and a beat from Coal
-Guidance for the coming year implies up to 6% growth on FY22 results
-Growth guidance has largely disappointed as coal decline drags  

By Danielle Austin

While rail freight operator Aurizon Holdings ((AZJ)) has delivered a full year result largely in line with consensus expectations, the market is focused on a weaker than expected FY23 guidance.

The company achieved full year earnings of $1,468m, with one-offs contributing $65m, and net profit of $525m. Both realised earnings and net profit were a beat on consensus forecasts of $1,455m and $510m respectively.

The Bulk segment was highlighted as delivering a disappointing result, reportedly missing its internal earnings target by -21%. Earnings of $130m from the segment were down -7% on the previous comparable period, with iron ore volumes down -20%.

Alongside its results the company has provided initial guidance for FY23, implying 0.0-5.5% growth and largely disappointing against expectations. Guidance for the coming year including a maiden earnings contribution from One Rail Bulk, which is expected to provide an $85-90m earnings benefit over eleven months, or a 6.0% benefit to earnings, as well as a 3.0-6.0% contribution from inflation.

Given this, even the top end of growth guidance of 5.5% implies some earnings benefit will be lost to declines in coal as high margin contracts come to an end.

The company flagged that despite a 5% volume improvement in coal, it expects earnings will decline as contract renewals are made at lower margins.

Upcoming contract opportunities could supplement company earnings, with South32’s ((S32)) Dendrobium mine seeking services through to 2035, and Idemitsu’s Boggabri seeking services through to 2037, while BHP Group’s ((BHP)) Mount Arthur project, for which Aurizon already holds the contract until 2026, is set to close in 2030.

Divestment ahead flagged as a catalyst

With the One Rail acquisition completing in July, the brokers are largely in agreeance that divestment of the East Coast Rail asset will be a next catalyst for Aurizon.

The company has stated it has engaged with around ten potential acquirers for its East Coast Rail asset, and non-binding bids from interested parties are due in September

Following the release of Aurizon Holdings’ FY22 results, six FNArena’s database brokers updating views have between them issued one equivalent Buy rating, three equivalent Hold ratings, and two equivalent Sell ratings. Between them, these brokers have an average target price of $3.86.

Morgans (Add rated with a target price of $4.20) anticipates downgrades to earnings forecasts from the market given Aurizon 's disappointing initial guidance for FY23. The Morgans analysts also highlighted the entire funding of the One Rail acquisition through a floating rate bank loan will likely drag on earnings moving forward.

Morgans’ modelling assumes East Coast Rail is sold at enterprise value of $1.1bn, noting each $100m difference to the sale price represents 5 cents per share to the company’s equity valuation. The broker also expects new contract wins in haulage to be a price catalyst.

Despite describing the stock as offering a balanced risk-reward outlook, Citi (Neutral rated with a target price of $4.17) retains its rating given the lower end of growth guidance remains flat year-on-year, but does note the East Coast Rail divestment is attracting positive commentary.

The Citi analysts noted despite meeting expectations in FY22, the company’s result was compositionally lower quality. Looking ahead, the broker also continues to see an elevated likelihood of a return of La Nina weather later in 2022, impacting on volumes. Citi revised it net profit forecasts -2%, 4% and 6.5% through to FY24, accounting for the softer near-term coal outlook.

Describing the FY22 result as disappointing, Macquarie (Neutral rated with a target price of $4.05) finds that the result highlights the continuing earnings volatility in the company’s Bulk segment. The broker also finds the company’s FY23 guidance soft, noting it anticipates a 6.0% earnings benefit from the One Rail acquisition and at least a 3-6% earnings benefit from inflation.

The broker sees coal margins dropping to FY17 levels and dragging on earnings ability but anticipated the company will benefit from gains come FY24. Macquarie has updated its earnings per share outlook by -11.6%, -6.3% and 9.2% through to FY25 to reflect softer coal margins in the next year.
 

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