Company Overview: Aurizon Holdings Limited (ASX: AZJ) is one of Australia’s leading rail freight operators that provide integrated freight and logistics solutions across an extensive national rail and road network, traversing Australia. Under its Coal segment, the company is responsible for transporting coal from mines in Queensland and New South Wales to end customers and ports. Under its Bulk segment, the company transports bulk mineral commodities, agricultural products, mining, and industrial inputs to its customers. The company was listed on ASX on 22^nd November 2010.

AZJ Details

Key Takeaways from FY21 Results: Despite the challenging market conditions caused by the COVID-19 pandemic and China import restrictions, AZJ was able to report decent operational and financial performance in FY21. Key highlights of FY21 results are as follows: 

• Slight Decline in Revenue: For the year ended 30 June 2021, the company reported total revenue of $3,019.3 million, down by 1% on the previous year, mainly due to reductions in Coal partially offset by continued Bulk growth and WIRP fee commencement in Network.
• Decline in Operating Costs: Operating Cost for FY21 stood at $1,537 million, down by 4% on the previous year, due to lower access and lower fuel costs in addition to transformation benefits offsetting costs to support volume growth in Bulk.
• Rise in EBITDA: EBITDA for FY21 stood at $1,482.2 million, up 1% on pcp, supported by the higher revenue from the commencement of Wiggins Island Rail Project (WIRP) and higher revenue through new contracts in the bulk segment.
• Rise in Free Cashflow: In line with EBITDA growth, the company’s free cash flow also grew by 1% to $734.4 million in FY21.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Track record of Rewarding Shareholders: AZJ has a decent track record of rewarding shareholders through buybacks and dividends. Over the past six years, the company has delivered more than $4 billion in distributions for Aurizon shareholders, including $1.3 billion in buybacks. In H2FY21, the company has paid a final dividend of 14.4 cents per share (70% franked), up 5% on pcp, representing a payout ratio of 100% of underlying NPAT for the continuing operations. This took the total FY21 dividend to 28.8 cents per share, up 5% on the last year. From FY17 to FY21, the company’s total dividend has grown at a CAGR of ~6.37%, demonstrating its focus on rewarding the shareholders via dividends. At the CMP of $3.71, the company’s annual dividend yield stood at ~7.78%, higher than 5-year average dividend yield of 5.64%.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 77.1%, up from 74.5% in FY20. Net margin for FY21 stood at 20.2%, up from 19.8%. Current ratio for FY21 stood at 1.13x, up from 0.49x in FY20, demonstrating that the company has improved its ability to pay short-term obligations. ROE for FY21 stood at 14.1%, up from 13.4% in FY20.

Liquidity Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 24.52% of the total shareholding, while the top four constitute 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 3.31%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

First Sentier Investors Holdings Pty Limited Became a Substantial Holder: On 27 September 2021, First Sentier Investors Holdings Pty Limited recently became a substantial holder of the company with 5.01% voting power. First Sentier Investors Holdings Pty Limited currently holds around 92,294,191 fully paid ordinary shares of the company.

Key Risks:

• COVID-19 Uncertainties: COVID-19 pandemic can impact the demand for the company’s services and could also disrupt the company’s supply chain.
• Stiff Competition: The company is exposed to risks related to stiff competition as competitors may decide to compete at reduced margins or accept lower returns.

Outlook: Over the next decade, the company intends to double the earnings of its Bulk business through organic growth, and acquisitions such as its new ports businesses in Newcastle and Townsville. In FY22, the company expects coal volume growth to be around 5%, supported by the recovery in markets. For FY22, the company expects its group EBITDA to be in the range of $1,425 million - $1,500 million. Sustaining capital expenditure in FY22 is expected to be between $475 million to $525 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has corrected by 2.46% and is currently trading lower than the average 52-week price level band of $3.44 - $4.44. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering the uncertainties surrounding the impact of COVID-19 pandemic, and risks related to the fluctuations in demand for coal. For the purpose of valuation, peers such as Qube Holdings Ltd (ASX: QUB), Camplify Holdings Ltd (ASX: CHL), Dalrymple Bay Infrastructure Ltd (ASX: DBI).  Considering the company’s decent operational and financial performance, track record of paying decent dividends, expected growth in coal volumes, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $3.71 as on 30 September 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

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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