Company Overview: Aurizon Holdings Limited (ASX: AZJ) is Australia's leading rail freight operator that connects miners, primary producers, and industry with international and domestic markets. The company has three operating businesses: Network, Coal and Bulk. AZJ is a specialist in providing services of rail design, engineering, construction, management and maintenance. AZJ also operates and manages the complex coal rail network in Central Queensland and builds new tracks to move freight more efficiently.
AZJ Details
Expansion of Bulk Business to Support Future Growth: Aurizon Holdings Limited (ASX: AZJ) is mainly involved in providing integrated freight and logistics solutions across an extensive national rail and road network, traversing Australia. Since FY17, the company has been reporting stable and resilient free cash flows, which has provided certainty on distributions. Further, AZJ continues to maintain discipline in capital deployment to support shareholder returns. Over the past six years, the company has returned around $4.3 billion to its shareholders via dividends and share buybacks. The company’s resilient free cash flows have improved its credit profile, because of which, the company’s debt markets remain supportive.
The key drivers of the company’s financial and operational performance are its productivity initiatives, cost reduction focus, and its ongoing transformation. Looking ahead, the company is focused on improving its supply chains to support robust long-term demand for key commodities. For its Bulk business, the company is targeting new markets as it expands across supply chains, including port and terminal services. For its Network business, the company is focused on ensuring long-term regulatory certainty, reducing costs and enhancing the efficiency of the supply chain.
5-Year Financial Summary (Source: Analyses by Kalkine Group)
Decent Performance by Bulk Business in H1FY21: During H1FY21, the company witnessed a soft coal volume environment, mainly due to the challenging trade environment in China. Network coal volume stood at 103.7mt in H1FY21, down by 11% on pcp. Above rail coal volume also declined by 4% YoY to 101.8mt. Notably, the revenue from bulk business grew by 8% YoY in H1FY21, supported by higher volumes. Operating costs during H1FY21 declined by 5% YoY to $760 million, reflecting lower Coal and Network volumes and ongoing operating efficiencies. Statutory EBIT for H1FY21 stood at $454 million. As at 31 December 2020, the company had total borrowings of $3,774 million.
Operating Costs Trend (Source: Analyses by Kalkine Group)
Top 10 Shareholders: The top 10 shareholders together form around 23.13% 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 3.65%, respectively, as also highlighted in the chart below:
Data Source: Analysis by Kalkine Group
Key Metrics: For H1FY21, the company reported gross margin of 77.8%, up from 75.5% in H1FY20. Further, the company’s EBITDA margin stood at 49.1% in H1FY21, up from 47.8% in H1FY20. Current ratio for H1FY21 stood at 0.74x, up from 0.49x in H1FY20, demonstrating that the company has improved its ability to pay short-term obligations. ROE for H1FY21 stood at 6.3%, up from the industry median of 1.4%.
Liquidity Profile & Profitability Metrics (Data Source: Analysis by Kalkine Group)
Above Rail Volumes Update for March Quarter: For March 2021 quarter, the company reported total above rail volumes of 60.7mt, down by 4% on pcp. Notably, the bulk volumes stood at 12.1mt, up 5% on pcp. Over the quarter, the coal volumes were 6% lower on pcp, with lower volumes in both CQCN and NSW/SEQ due to softer customer demand, the cessation of the Stanwell contract and adverse weather impacting mine production.
Change in Directors’ Interest: One of the company’s Director, Marcelo Bastos, who holds indirect interest in the company, recently acquired ~10,000 ordinary shares of the company at a price of $3.7 per share via on-market trade. Marcelo Bastos now holds an indirect interest in 35,947 ordinary shares of the company.
Track Record of Paying Consistent Distributions: Supported by its stable cashflows, AZJ has maintained a record of paying consistent distributions to its shareholders. Over the past six years, the company has delivered around $4.3 billion in shareholder distributions, including $1.3 billion in buy-backs with dividends maintained at 100% of NPAT. For H1FY21, the company paid an interim dividend of 14.4 cents per share, up 5% on pcp, representing a 100% payout ratio of underlying continuing NPAT. In FY21, the company commenced a $300 million buyback. In March 2021, the company completed the buyback under which it bought around 73,938,850 shares of the company for a total consideration of ~$299.98 million. At CMP of $3.7, the company’s annual dividend yield stood at 7.53%, higher than the 5.11%. Looking ahead, the company expects its future cash flow to continue deliver strong shareholder distributions. This might help in attracting the attention of dividend seeking investors.
Dividend Trend (Source: Analyses by Kalkine Group)
Key Risks: The company is exposed to the risks related to the fluctuations in the demand for Coal in different countries. Further, the company is exposed to the risks related to the COVID-19 pandemic as it could cause fluctuation in coal volumes and cause supply chain disruption. Adverse weather could impact mine production, which might disrupt the coal volumes as witnessed in Q3FY21.
Outlook: Despite China’s reducing participation in seaborne markets, Australian Coal export is expected to grow by 1% over the next decade, supported by steel-intensive growth in India and prolonged coal-fired generation driven by a relatively young existing fleet in Asia. The company believes that its control over the capital and cost levers will help it in tacking the impact of the lower coal volumes in the near term.
For FY21, the company expects its EBIT to be in the range of $870 - $910 million. Further, it expects its FY21 free cashflow to be around $700 million, inclusive of Acacia Ridge net proceeds. For its bulk business, the company is focused on expanding into new markets such as renewables and batteries, which could change the commodity mix for coal and non-coal revenue in the AZJ portfolio. The company believes that these new markets have the potential to double Bulk’s EBIT over ten years to $250 million.
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
Stock Recommendation: The stock of AZJ has corrected by 4.98% in the last three months and is currently trading lower than the average 52-week price level band of $3.440 -$5.065. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peers, considering the rise in H1FY21 dividend, improved profitability metrics, modest long-term outlook, and taking into account that the company has been commanding a premium in the past 3-years over its peer average. We have taken peers like Dalrymple Bay Infrastructure Ltd (ASX: DBI), Lindsay Australia Ltd (ASX: LAU), and Qube Holdings Ltd (ASX: QUB). Considering the company’s track record of generating decent cash flows and paying consistent distributions, its ongoing focus on expanding its bulk business, rise in H1FY21 dividend, modest long-term outlook, current trading level and valuation, we give a “Buy” recommendation on the stock at the current market price of $3.70, down by 0.805% as on 24 June 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.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
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