Company Overview: Aurizon Holdings Limited (ASX: AZJ) is Australia’s leading rail freight operator that provides integrated freight and logistics solutions across an extensive national rail and road network, traversing Australia. The company’s coal business provides critical service to Australia’s export coal industry and transports approximately 200 million tonnes of metallurgical and thermal coal annually. The company also provides integrated supply chain solutions and connects miners, primary producers and the manufacturing industry with international and domestic markets.
AZJ Details
Decent Long-term Fundamentals: Aurizon Holdings Limited (ASX: AZJ) is a leading rail freight operator in Australia that connects miners, primary producers, and industry with international and domestic markets. As on 3 December 2020, the market capitalisation of the company stood at ~$7.93 billion. The company operates under three main segments – Network, Coal and Bulk. The company’s integrated business model provides a defensive stream of earnings from its regulated track infrastructure which is comprised of the Central Queensland Coal Network (CQCN), a critical part of the supply chain for Queensland’s coal industry. The company is committed to returning surplus funds to shareholders and has a track record of paying regular and decent dividends to its shareholders. From 2016 to 2020, the company’s statutory NPAT grew at a CAGR of ~70.26%.
Although the COVID-19 pandemic has created a short-term uncertainty around the demand for coal, the fundamental demand drivers of Australian metallurgical and thermal coal remain decent over the next decade. Looking ahead, AZJ intends to maintain its focus on accelerating cost competitiveness and achieving regulatory reform and competitive advantage through asset efficiency strategy. Further, the company is committed to investing in the coal business to deliver improved productivity in the future. AZJ expects operational efficiency improvements to remain a key driver in the business.
5-Year Financial Summary (Source: Company Report, Thomson Reuters)
Decent FY20 Performance Amid COVID-19 Pandemic: Despite the economic uncertainty that unfolded during the second half of FY20, AZJ reported a 10% YoY growth in FY20 Earnings Before Interest and Tax (EBIT) of $909 million, reflecting the resilience of the company’s business. In its Coal business segment, the company delivered 214 million tonnes (mt) of coal for customers during FY20, which is broadly in line with FY19. EBIT for Coal segment stood at $410.6 million, which is slightly down by 1% on Y-o-Y basis. Moreover, AZJ secured contract extensions with major customers during the year. In its Bulk business segment, the company reported EBIT of $52.6 million, up 141% on the previous year, driven by the higher revenue from new contracts and ongoing efficiency improvements. During FY20, Aurizon Bulk completed the acquisition of Townsville Bulk Storage and Handling, which operates bulk transport, handling and stevedoring services in North Queensland. This acquisition will allow the company to extend supply chain services beyond its core rail capability on the Mount Isa line corridor. One of the important milestones of FY20 was the final approval from the Queensland Competition Authority for the 10- year Access Undertaking (UT5) for the Central Queensland Coal Network.
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. In line with its commitment of returning surplus funds to shareholders, AZJ completed $400 million on-market buy-back during the year. For FY20, the company’s statutory NPAT stood at $605.1 million, up by 28% on FY19. As at 30 June 2020, the company had available liquidity of over $1.1 billion.
FY20 Results (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 20.12% of the shareholding. BlackRock Institutional Trust Company, N.A. and Vanguard Investments Australia Ltd. hold the maximum interest in the company at 3.80% and 3.19%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
A Quick look at Key Margins: Gross margin for FY20 stood at 74.5%, higher than the industry median of 39.2%. For the same period, the company reported EBITDA margin of 48.1%, which is higher than the industry median of 28%. ROE for FY20 stood at 13.4%, up from 10.1% in FY19, demonstrating the company’s improving returns. The current ratio and quick ratio for FY20 stood at 0.49x and 0.39x, respectively.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Track Record of Paying Decent Dividend: Over the past five years, the company has delivered $3.5 billion in distributions to shareholders, including $1 billion in share buybacks. For FY20, the company has paid a final dividend of 13.7 cents per share, taking the total full-year dividend to 27.4 cents per share (70% franked), representing 15% growth on FY19. From 2016 to 2020, the company’s dividend grew at a CAGR of 2.73%. The company’s annual dividend yield currently stands at ~6.46%, higher than the average 5-year dividend yield of 5.11%.
5-Year Shareholder Return (Source: Company Reports)
Q1FY21 Above Rail Volumes Update: For the September 2020 quarter, the company reported total coal volumes of 50.0mt, down by 5% on pcp, mainly due to the impact of COVID-19 on coal demand and reduction of aggregate coal import volume by China. The company expects railing to improve in H2FY21 as steel capacity comes back online in key export markets. From Central Queensland Coal Network (CQCN), AZJ reported coal volumes of 34.7mt, down by 5% on pcp, due to lower demand, mine maintenance activities and a derailment in the Blackwater corridor in July. In the bulk segment, the company reported total volumes of 13.1mt for the quarter, up 12% on pcp, driven by iron ore, principally the commencement of railings for Mineral Resources (January 2020).
Quarterly Above Rail Volumes (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 ~54.46 million shares under the on-market buy-back program for a total consideration of ~$223.89 million.
Key Risks: The company is exposed to the risks associated with high competition as competitors may compete at reduced margins and accept lower returns and greater risk positions than AZJ. Further, the company is exposed to the risks associated with COVID-19 pandemic as it could impact the demand of coal across different countries and create supply chain issues.
Outlook: Looking ahead, the company is focused on continuing operational efficiency improvements that support contracted volume growth. The long-term transformation of AZJ is expected to deliver more efficient supply chains for customers and help maintain Australia’s global competitiveness.
Based on the current view of COVID-19 impact on steel demand, the company expects FY21 coal volumes to be in the range of 210-200mt. Despite short-term fluctuations caused by COVID-19 pandemic, the fundamental demand drivers of coal Australian metallurgical and thermal coal remain strong and supports Australian Coal export growth of 1-2% pa over the next decade. In the Network segment, the company expects volumes to be lower than the approved tariff forecast of 239mt due to COVID-19 resulting in revenue under-recovery. FY21 Group Underlying EBIT is expected to be in the range of $830 million - $880 million. The capital expenditure for FY21 is expected to be in between $500 million - $550 million.
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 provided a return of 13.49% in the last one month and is trading below the average 52-weeks price level band, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$4.148 and a resistance level of ~$5.064. 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 upside (in % terms). Considering the company’s decent operational and financial performance in FY20, track-record of paying a decent dividend, intact long-term fundamental demand drivers of coal, valuation, and current trading levels, we give a “Buy” recommendation for the stock at the current market price of $4.290, up by 1.179% on 3 December 2020.
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AZJ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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