Company Overview: 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 operates 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.
AZJ Details
Improving Bottom-Line: Aurizon Holdings Limited (ASX: AZJ) is Australia’s leading rail freight operator, which specializes in the services of rail design, engineering and construction and offers large-scale supply chain solutions to various types of customers. The company is focused on improving its operational performance, asset efficiency and cost competitiveness by enhancing operational efficiencies. 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. In the past few years, the company has built strong foundations for itself by simplifying the business model and focusing on core services for its customers. Over the last five years, the company has witnessed significant improvement in its bottom line with NPAT growing at a CAGR of ~71% from 2016 to 2020.
Historical Performance (Source: Company Reports, Thomson Reuters)
Due to the essential nature of its services, the company continued its operations with minimal interruption during the COVID-19 pandemic across all its business segments. The company undertook various measures to protect its employees from the virus and ensure resilience of operations. In its Coal segment, the company is focused on operational efficiency improvements supporting contracted volume growth. It is worth noting that over the next decade the Australian Coal export growth is expected to increase by 1-2%, underpinned by supportive demand drivers. In the Bulk segment, the company expects its decent performance to continue in the future, due to the award of new contracts and operational efficiencies. 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 total revenue of $3,064.6 million, up 5% on the previous year, reflecting the approved UT5 Undertaking in the Network segment and new contracts in the Bulk segment. Despite the uncertain business environment that unfolded during H2FY20, the company’s EBIT during FY20 grew by 10% to $909 million. For the full year, the company reported statutory NPAT of $605 million, up 28% on FY19.
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. One of the major highlights of FY20 was the completion of the $400 million on-market share buy-back. For FY20, the company reported a free cash flow of $715 million, which includes proceeds from the sale of Rail Grinding business offset by working capital movements.
FY20 Result Highlights (Source: Company Reports)
Remarkable Improvement in Bulk Segment EBIT: In the span of three years, the company has improved its Bulk segment EBIT by more than $100 million, rising from a negative $14 million in FY17 to $90 million in FY20. In FY20, the company’s Bulk business delivered decent results supported 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.
Bulk Segment Results (Source: Company Reports)
Coal Segment Riding on Contract Extensions with Major Customers: In the Coal segment, the company secured contract extensions with major customers during FY20. The company now operates in all coal systems across the east coast of Australia. From the Coal segment, the company reported total revenue of $1,775, up 3% on FY19. Further, the company’s EBIT stood at $411 million.
Coal Segment Results (Source: Company Reports)
Network Segment EBIT Up 17%: From the Network segment, the company reported total revenue of $1,189 million, up 6% on FY19, driven by the increase in track access revenue and other revenue growth from higher external construction works. Over the year, the company’s other operating costs reduced by $6 million to $282 million, due to lower services spend, overhead savings and lower employee costs. 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 19.66% 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)
Dividend History: Over the past five years, the company delivered $3.5 billion in shareholder distributions including $1 billion in buy-backs, with dividends maintained at 100% of NPAT. The company declared a final dividend of 13.7cps, taking the full year dividend to 27.4 cents per share, representing 100% of continuing underlying net profit after tax for the fifth consecutive year. The final dividend has an ex-date of 24 August 2020 and is payable on 21 September 2020.
Dividend History (Source: Company Reports)
Pricing of Medium Term Notes: On 27 August 2020, the company announced that it has successfully priced another issuance under its Aurizon Network Pty Ltd (Aurizon Network) A$ Debt Issuance Program, as per which, the company will issue A$500 million 10-year notes (Notes) at a fixed coupon of 2.9% per annum. The notes are going to mature in September 2030. This issuance will diversify the company’s funding sources and lengthen its debt maturity profile.
$300 million Buy-back: The company recently announced a $300 million on-market share buy-back which is expected to be completed in FY2021. As on 10 August 2020, the company has bought back ~5.99 million shares under the on-market buy-back program for a total consideration of $26.02 million.
Key Risks: The company is exposed to the risks and uncertainties of COVID-19 pandemic as it could impact the demand of coal across different countries and create supply chain issues. The company may face competition from parties willing to compete at reduced margins and accept lower returns and greater risk positions than AZJ. The company may experience business interruption and consequential financial impact from a range of circumstances including, road vehicle incident, process safety incident, illegal protest activity, cyber security incidents, technology incidents and adverse weather events.
What to Expect: In FY21, the company expects operational efficiency improvements to remain a key driver in the business. For the full year, the company expects its EBIT to be in the range of $830 million– $880 million.
In its Coal segment, the company is focused on operational efficiency improvements supporting contracted volume growth. It is worth noting that over the next decade the Australian Coal export is expected to increase by 1-2%, underpinned by supportive demand drivers. The company expects flat volumes of 210-220mt in the coal segment, based on the current view of COVID-19 impact on coal demand. In the Buk segment, the company expects its decent performance to continue in the future, due to the award of new contracts and operational efficiencies. 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.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)
Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: On a YTD basis, the stock of AZJ has corrected by 18.98% and is inclined towards its 52-weeks low of $3.380, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$4.107 and a resistance level of ~$4.793. The company currently has an annual dividend yield of 6.42%. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). Considering the company’s decent financial and operational performance in FY20; its robust balance sheet; FY21 guidance, and track record of rewarding shareholders through dividends and buy-backs, we give a “Buy” recommendation on the stock at the market price of $4.320, up by 1.171% on 10 September 2020.
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AZJ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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