September 19

Steaming Ahead: Aurizon’s Resilience and Growth Prospects in Rail Freight

Aurizon (AZJ) is a rail freight operator company. Each year, the Company transports more than 250 million tonnes of Australian commodities, connecting miners, primary producers and industry with international and domestic markets. It provides customers with integrated freight and logistics solutions across an extensive national rail and road network, traversing Australia. The Company also owns and operates coal rail networks, linking approximately 50 mines with three major ports in Queensland.

Aurizon Holdings endured a tough year, but we expect a much better performance in FY2024 and beyond.

FY2023 underlying EBITDA fell 3% to $1.43 billion, in line with our expectations, as wet weather impacts offset the One Rail acquisition. Underlying net profit after tax fell 30% to $367 million on significant increases in depreciation and interest expense. Overall, we think it a solid result in difficult conditions. The firm won a few new contracts during the year, and management confirms competitive pressure on tariffs is abating. Regardless, the business has very few contracts maturing in the next two years. With rising tariffs and recovery of volumes, earnings growth should be solid for at least the next couple of years. We make only minor changes to our forecasts and maintain our $4.70 fair value estimate. The stock screens as undervalued at current prices, trading on a FY2024 P/E ratio of 15 and offering a dividend yield of 5% mostly franked. All operating segments have a positive FY2024 outlook, with the regulated rail track network benefiting from higher allowed returns, the coal haulage business benefiting from recovery of volumes, and CPI-linked tariffs, and the non-coal bulk haulage business benefiting from increased volumes, the full-year contribution of the One Rail acquisition, and cost synergies from the acquisition.


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