Company Overview: Aurizon Holdings Limited (ASX: AZJ) is Australia’s leading rail freight operator that specializes in the services of rail design, engineering, and construction. The company also offers large-scale supply chain solutions to various types of customers. AZJ owns and operates one of the world’s largest coal rail networks, linking approximately 50 mines with three major ports in Queensland. The company operates three main segments – Network, Coal and Bulk. The company’s vision is to be the first choice for bulk commodity transport solutions and its purpose is to grow by delivering bulk commodities to the world.
AZJ Details
Improving Bottom-Line: Aurizon Holdings Limited (ASX: AZJ) is a leading rail freight operator that provides integrated freight and logistics solutions across an extensive national rail and road network, traversing Australia. The company has three main segments – Network, Coal and Bulk. Under its Network segment, AZJ is involved in the provision of access to, and operation of, the Central Queensland Coal Network (CQCN). Further, the company is also involved in the maintenance and renewal of Network assets. Under its Coal segment, AZJ transports 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’s vision is to be the first choice for bulk commodity transport solutions, and its purpose is to grow by delivering bulk commodities to the world. Over the past four years, the company has witnessed significant improvement in its top and bottom line. From 2016 to 2020, the company’s revenue has increased at a CAGR of 71.02%.
Historical Performance (Source: Company Reports, Thomson Reuters)
Due to the vital nature of its services, AZJ has been operating throughout the COVID-19 pandemic with safety and protective measures in place. In the recent years, the company has built strong foundations for itself by simplifying the business model and focusing on core services for its customers. Looking ahead, the company expects operational efficiency improvements to remain a key driver in the business in order to improve its operational performance, asset efficiency and cost competitiveness. From a funding perspective, the company currently seems to be well placed with a robust balance sheet.
FY20 Results Highlights: For the year ended 30 June 2020 or FY20, the company reported solid operational and financial performance, despite the emergence of COVID-19 in H2FY20. The company delivered Underlying Earnings Before Interest and Tax (EBIT) of $909 million in FY20, up 10% on the previous year, driven by higher EBIT in the Network business and a strong performance by the Bulk business. Further, the company reported Underlying Net Profit After Tax (NPAT) of $531 million, up 12% on FY19. Further, the company’s statutory NPAT stood at $605 million, up 28% on the previous year.
For the second half of FY20, the company has declared a final dividend of 13.7 cents per share, taking the full year dividend to 27.4 cents per share, 70% franked, representing 100% of continuing underlying net profit after tax for the fifth consecutive year.
One of the major highlights of FY20 was the completion of the $400 million on-market share buyback. During the year, the company completed the refinancing of Aurizon Network’s bank facilities, extending the maturity to 2023- 2025 and increasing the facility size by $420 million to $1.3 billion. As at 30 June 2020, the company had $1.1 billion of available liquidity. During the year, the company received approval from the Queensland Competition Authority for the 10-year Access Undertaking (UT5) for the Central Queensland Coal Network. This agreement provides a platform for continued performance improvement across the supply chain.
FY20 Results Snapshot (Source: Company Reports)
Segment Wise Results:
Bulk Segment: During FY20, the company’s Bulk business delivered solid results underpinned by the new and extended haulage contracts and the ongoing transformation benefits. The segment reported revenue of $609 million in FY20, up 21% on the previous year, due to new contract growth and improved revenue quality. Further, the company reported EBIT of $90 million, up 143% on the previous year. It is worth noting that in the span of three years, Bulk has improved its EBIT by more than $100 million.
Bulk Segment Results (Source: Company Reports)
Coal Segment: During FY20, the Coal business delivered 214 million tonnes (mt) of coal for customers and achieved an EBIT of $410.6 million. Total revenue of the segment stood at $1,775 million in FY20, up 3% on the previous year. During the year, the company bagged several new contracts which include the contract related to the extension of all existing volumes and new business on the CQCN and NSW; and the Bluescope contract under which the company commenced railings in April 2020.
Coal Segment Results (Source: Company Reports)
Network Segment: During FY20, the Network segment reported total revenue of $1,189 million, up 6% on the previous year, mainly due to the increase in track access revenue and other revenue growth from higher external construction works. The company reported EBIT of $469 million, up by 17% on the previous year.
Network Segment (Source: Company reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 19.7% of the shareholding. BlackRock Institutional Trust Company, N.A. and Vanguard Investments Australia Ltd. hold the maximum interest in the company at 3.74% and 3.14%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
A Quick look at Key Margins: For FY20, the company’s gross margin stood at 74.5%, higher than the industry median of 39.2%. For the same period, the company reported an EBITDA margin of 48.1%, higher than the industry median of 28%. The company’s net margin stood at 19.8% in FY20. The company has a current ratio of 0.49x.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Track Record of Rewarding Shareholders: AZJ enjoys consistent free cash flow generation which has allowed the company to deliver $3.5 billion in shareholder distributions over the past five years, including $1 billion in buybacks, with dividends maintained at 100% of NPAT. For the second half of FY20, the company has declared a final dividend of 13.7 cents per share, taking the full year dividend to 27.4 cents per share, 70% franked, representing 100% of continuing underlying net profit after tax for the fifth consecutive year. The final dividend is payable on 21 September 2020.
Cashflow and Shareholder Returns (Source: Company Reports)
Appointment of New CFO: The company recently appointed George Lippiatt as its new Chief Financial Officer (CFO). George Lippiatt joined the company in 2013 and before that he held senior roles in different companies, like KPMG and Suncorp Bank. He has around 15 years of experience in corporate finance, strategy and sustainability.
Key Risks: The company may face competition from parties willing to compete at reduced margins and accept lower returns and greater risk positions than AZJ. The COVID-19 pandemic exposes the company to the risk of reduced demand which could impact the company’s profitability. Further, the risk extends to other supply chain participants such as mines and ports, and their ability to provide continuity of service. In FY2020, the COVID-19 pandemic had some impact on coal demand in Asia and on the Indian sub-continent.
What to Expect: The company is aware of the continuing economic uncertainty in the markets and the inevitable headwinds that will flow through to its business in FY21. From an operational perspective, the company is benefitting from a decentralised workforce with more than 80% of employees working and living in regional areas of Australia. In FY20, the company implemented a new legal and capital structure that is helping in optimising the balance sheet and unlocking additional value for shareholders. The company’s Board has recently announced a $300 million on-market share buy-back which is expected to be completed in FY21.
In the Coal business, the company expects flat volumes of 210-220mt based on current view of COVID-19 impact on coal demand. In its Network business, the company expects CQCN volumes to be lower than 239mt due to COVID-19 impact on coal demand, resulting in revenue under-recovery. The company expects no material disruptions to commodity supply chains.
In FY21, the company expects operational efficiency improvements to remain a key driver in the business. For the full year, the company anticipates Group EBIT to be in the range of $830m – $880m. From a funding perspective, the company currently seems to be well placed with a robust balance sheet.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The stock of AZJ has corrected by 12.8% in the last six months and is trading near the average of its 52 weeks price range. The company currently has an annual dividend yield of 5.74%. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). Considering the company’s solid financial and operational performance in FY20; growth in Bulk and Network business; robust balance sheet; and track record of rewarding shareholders through dividends and buy-backs, we give a “Buy” recommendation on the stock at the market price of $4.610, down by 3.354% on 13 August 2020.
AZJ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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