Company Overview: Aurizon Holdings Limited (ASX: AZJ) is Australia’s leading rail freight operator that provide integrated freight and logistics solutions across an extensive national rail and road network, traversing Australia. The company’s coal business offers 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. Under its Bulk segment, the company transports bulk mineral commodities, agricultural products, mining, and industrial inputs to its customers.
AZJ Details
Long-term Drivers Intact for Future growth: 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. The company operates under three main segments – Network, Coal and Bulk. During FY20, the company witnessed significant improvement in the operational and financial performance and reported 10% YoY growth in EBIT, mainly due to improved results in Bulk and Network segment. This reflects the benefits of the company’s ongoing efficiency improvements. In line with its gold of maximising shareholders return, the company has maintained 100% dividend payout ratio of underlying NPAT for the continuing operations in FY20. From 2016 to 2020, the company’s statutory NPAT has grown at a CAGR of 70.26%.
Despite the uncertain conditions and challenges caused by the COVID-19 pandemic, the company has performed solidly in market during H1FY21, with steady earnings and increased dividends for shareholders, demonstrating the strength and resilience of the business. Looking ahead, AZJ is focused on accelerating cost competitiveness and achieving competitive advantage through asset efficiency. Due to steel-intensive growth in India and a relatively young fleet of coal-generation power plants in Asia, the company expect coal export to grow by around 1% per year over the next decade. Moreover, it expects to witnessed growth in the revenue and profitability of its Bulk business, as it taps into growth commodities such as fertilisers, industrials and battery inputs. Over the long run, the company has a decent business prospects at the back of decent fundamentals coupled with continued contract book extension for both Coal & Bulk segments, and ongoing operational efficiency improvement.
5-Year Financial Summary (Source: Company Reports, Thomson Reuters)
1HFY21 Results Highlights: During 1HFY21, the company reported flat EBITDA at $454.2 million with higher earnings in Bulk and Network being offset by a reduction in Coal. Bulk segment reported EBIT of $60.5 million in H1FY21, up by 38% on pcp. Network segment reported EBIT of $241.3 million, up 4% on pcp, mainly due to the commencement of WIRP fees. EBIT from Coal segment declined by 17% to $170.9 million in 1HFY21, mainly due to reduction in volumes and lower revenue quality. The operating cost of the company declined by 5% to $37.5 million in 1HFY21, mainly due to lower external construction and electricity costs in Network and lower redundancy costs and the impact from the sale of Rail Grinding business. Statutory NPAT for 1HFY21 stood at $272.2 million. During the half-year period, AZJ completed $247 million of a planned $300 million on market share buy-back. At the end of 1HFY21, the company had total net assets of $4,109.7 million and gearing ratio of 47.8%.
1HFY21 Segment Wise EBIT (Source: Company Reports)
Decent FY20 Performance Amid Macroeconomic Uncertainties: For the year ended 30 June 2020, AZJ reported underlying EBIT of $909 million, up 10% on the previous year, driven by the increase in the revenue of Bulk and Network segment. Further, the company reported statutory NPAT of $605 million, up 28% on FY19. The company’s Bulk segment reported revenue of $609 million in FY20, up 21% on the previous year, due to new contract growth and improved revenue quality. From the Coal segment, the company reported total revenue of $1,775 million and EBIT of $411 million. Due to the increase in track access revenue and other revenue growth from higher external construction works, the company’s network segment reported YoY growth of 6% in its total revenue which stood at $1,189 million. 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.
FY20 Results Highlights (Source: Company Reports)
Key Metrics: Over the past five years, the company has maintained decent profitably margins, supported by the company’s operational efficiency improvements. EBITDA Margin for FY20 stood at 48.1%, in line with FY19. Net margin for FY20 stood at 19.8%, up from 16.3% in FY19. ROE for FY20 stood at 13.4%, up from 10.1%. Current ratio for FY20 stood at 0.49x and debt to equity ratio stood at 0.86x.
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Profitability and Liquidity Profile (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Top 10 Shareholders: The top 10 shareholders together form around 20.49% of the total shareholding while the top four constitutes the maximum holding. BlackRock Institutional Trust Company, N.A. and Vanguard Investments Australia Ltd. are holding a maximum stake in the company at 3.87% and 3.25%, respectively, as also highlighted in the chart below:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Dividend History: Supported by consistent free cash flow generation, AZJ has delivered $3.5 billion in shareholder distributions over the past five years, including $1 billion in buybacks event. For FY20, AZJ paid total full-year dividend of 27.4 cents per share, 70% franked, representing an increase of 15% on FY19. For 1HFY21, the company has declared an interim dividend payment of 14.4 cents per share, 70% franked, up 5% on pcp. The dividend has a record date of 2 March 2021 and payment date of 31 March 2021. At CMP of $3.96, company’s annual dividend yield currently stands at 7.09%, higher than the 5-year average dividend yield of 5.11%.
Shareholder Returns (Source: Company Reports)
$300 million Buy-back Update: Following the completion of $400 million on-market buy-back in FY20, AZJ had commenced a new $300 million share buy-back, which is expected to be completed in FY21. As per the update provided on 18 February 2021, till now the company bought back ~60.98 million shares under the on-market buy-back program for a total consideration of ~$251 million. The lowest price for the buyback was paid on 2 November 2020 of $3.725 and highest price was paid on 3 September 2020 of $4.46.
Key Risks: AZJ 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.
Outlook: AZJ is optimistic about the long-term demand for high-quality Australian coal. It expects coal export to grow by 1% per year over the next decade, supported by steel-intensive growth in India and a relatively young fleet of coal-generation power plants in Asia. The company has increased its FY21 EBIT guidance to $870 million – $910 million, up from previous guidance of $830 million to $880 million. Based on current market conditions including a challenging China trade environment, the coal volumes in FY21 are expected to be between 200-210mt. The company expects to witness a growth in the revenue and profitability of its Bulk business, as it taps into growth commodities such as fertilisers, industrials and battery inputs. For FY21, the company expects its capital expenditure to be in the range of $500 million - $550 million.
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
Data Source: Refinitiv, Thomson Reuters, 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: The stock of AZJ has corrected by 15.02% in the last six months and is trading below the average 52-weeks price level band of $3.38 and $5.57, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$3.72 and a resistance level of ~$4.36. 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). We have taken a slight premium to its peer median P/E (NTM Trading multiple), considering the optimism around the long-term demand for high-quality Australian coal, and expected growth in the revenue and profitability of its Bulk business, and the company’s long-dated contracted revenue streams. We have taken peers like Qube Holdings Ltd (ASX: QUB), Atlas Arteria Group (ASX: ALX), Lindsay Australia Ltd (ASX: LAU), etc. Considering the company’s decent performance in Network and Bulk segment, track-record of paying decent dividends, modest outlook, increased EBIT guidance for FY21, current trading level and valuation, we give a ‘Buy’ recommendation on the stock at the current market price of $3.960, as on 18 February 2021.
AZJ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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