Company Overview: Aurizon Holdings Limited (ASX: AZJ) is Australia’s leading rail-based transport business that provides customers with 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). 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
Decent Growth in Bottom-Line Over the Past Five Years: 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. As at 8 October 2020, the company’s market capitalisation stood at ~$8.19 billion. 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. The company’s integrated business model provides a defensive stream of earnings from its regulated track infrastructure (the CQCN) which is a critical part of the supply chain for Queensland’s coal industry and delivers around half of all global seaborne export metallurgical coal. Over the last five years (2016 - 2020), the company has witnessed significant improvement in its bottom line with NPAT growing at a CAGR of ~71% over the period.
5-Year Performance (Source: Company Reports, Thomson Reuters)
Amid the COVID-19 pandemic, the company benefitted from its decentralised workforce with more than 80% of employees working and living in regional areas of Australia. Going forward, the company intends to maintain its focus on improving its operational performance, asset efficiency and cost competitiveness. Further, the company will continue to invest in technology to bring innovation and improve its operations. With a robust balance sheet, the company seems well-placed to fund its operations.
FY20 Results Highlights: For the year ended 30 June 2020, the company reported EBIT of $909 million, up 10% on the previous year, driven by the increase in the revenue of Bulk and Network segment. Despite the uncertain business environment that unfolded during H2FY20, the company reported statutory NPAT of $605 million, up 28% on FY19.
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. In the Coal segment, the company secured contract extensions with major customers during FY20. From the Coal segment, the company reported total revenue of $1,775 million and EBIT of $411 million. 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.
During FY20, the company continued the implementation of its Access Undertaking (UT5), delivering greater commercial and operational certainty to its Network customers. One of the important highlights of FY20 is the approval of the 10-year commercial agreement with the company’s customers who use the CQCN to transport their coal. During the year, the company substantially de-risked the near-term coal contract book, with only 13% of contracted volumes expiring in the next 3 years. The company completed a $1.3 billion debt refinancing in FY20 and issued a $500 million Network bond. As at 30 June 2020, the company had liquidity of $1,165 million with gearing at 45.1%.
FY20 Results (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)
Track Record of Paying Dividend: The company has a track record of paying regular dividends to its shareholders. For the second half of FY20, the company has declared a final dividend of 13.7cps, taking the full year dividend to 27.4 cents per share, representing a payout ratio of 100% of continuing underlying net profit after tax for the fifth consecutive year. Supported by the consistent free cash flow generation, the company has been able 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.
Cashflow and Shareholder Returns (Source: Company Reports)
$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 per the recent share buy-back notice, the company has bought back ~16.9 million shares under the on-market buy-back program for a total consideration of $73.2 million.
Pricing of Medium Term Notes: As per the update provided on 27 August 2020, the company has successfully priced another issuance under its Aurizon Network Pty Ltd (Aurizon Network) A$ 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. This issuance marks another step in fulfilling the company’s strategic objectives of diversifying funding sources and lengthening debt maturity profile. The notes are expected to be rated Baa1 by Moody's and BBB+ by Standard & Poor's and they are going to mature in September 2030.
Sustainability Report Update: In the recently released Sustainability Report, the company highlighted that it has witnessed 10% improvement in its total recordable injury frequency rate (TRIFR) in FY20, as compared to FY19. The company also highlighted that despite the emergence of COVID-19 pandemic, it continued to provide safe, reliable services to its customers, and support the regional communities where its people live and work.
Outlook: The company expects the demand for coal to remain soft in the first half of FY2021 but is expected to grow in the long term. Over the next decade, the demand for Australian coal export is expected to grow by 1-2% per annum, supported by infrastructure development and energy demand in Asia. As an owner and operator of one of the world’s largest coal rail networks, the company seems well placed to cater to the forecasted coal demand.
Looking forward, AZJ expects its operational efficiency improvements to remain a key driver in the business. In FY21, the company expects its EBIT to be in the range of $830m to $880m. Based on the current view of COVID-19 impact, the FY21 Coal volumes are expected to be around 210-220mt. In the Buk segment, the company anticipates decent performance to continue in the future, due to the award of new contracts and operational efficiencies. It is worth noting that the company expects no material disruptions to commodity supply chains in FY21.
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: The stock of AZJ has corrected by 11.75% in the past three months and is trading lower than the average 52-weeks price level range, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$4.133 and a resistance level of ~$4.547. The company is trading at a PE multiple of 13.57x with an annual dividend yield of 6.4%. We have valued the stock using the P/E 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 decent FY20 performance, its track record of paying regular dividends to shareholders, robust balance sheet and valuation, we give a “Buy” recommendation on the stock at the market price of $4.260, down by 0.467% on 8 October 2020.
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AZJ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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