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AURIZON VIDEO



 

Stock Of The Day - Aurizon (BUY)

In today’s report we cover Aurizon Holdings Limited (AZJ), which is Australia’s largest rail freight operator and moves on an average more than 700,000 tonnes of coal, iron ore and other minerals as well as agricultural and general freight across the nation, on a daily basis. The company’s long-term business strategy is to lower its cost base through productivity improvement. A highly focused performance driven culture is key in achieving this objective. The key milestones that the company has set for itself are achieving an EBIT margin of 25% in the year 2015, a long term EBIT of 30% and Return on Invested Capital of 12% to 14%, while maintaining a strong balance sheet that gives the company growth and capital management options. In the first half of the fiscal year 2015, the company delivered a 15% increase in the underlying EBIT while maintaining flat revenue growth indicating that the strategy is on track. The company reduced its costs by productivity improvements and lower discretionary spend within Operations ($57m) and centralised support areas ($12m). 


 

1HFY15 Results (Source: Company reports)

Revenues were flat at $1.97 billion, however Net Profit after Tax (NPAT) increased by 188% to $308 million indicating that the company was able to achieve its target of improving profitability. The operating ratio of the company improved by 3.1% to 75.3%. The company also started next stage of reforms of corporate support functions.

If we analyse the EBIT further by functional performance, we will see the maximum improvement has come from segment defined as ‘others’ and that reflects sales of assets and transformational benefits (to be more specific $40 million of net benefit of sale on Redbank maintenance facility and $4 million net decrease in operating costs and depreciation in the segment). There has also been an improvement in EBIT for the segment ‘operations’, largely attributed to cost reductions through fleet rationalizations, productivity and fuel consumption improvement. Underlying EBIT in operations was up by $39 million (or 3%) of which $63 million was reduction in operating costs (including depreciation but excluding access) of which $57 million is transformation benefit. There was a $9 improvement in access charges and $15 million net decrease in revenue reflecting lower external rolling stock, maintenance services and lower internal below rail maintenance services. 



Underlying EBIT by Function (Source: Company reports)

For ‘network’ segment, the underlying EBIT has been flat because revenue growth was capped by transformational tariffs and GAPE (a railroad line) revenue at full ramp up. Operational expenditure has been flat due to tight cost control. Transitional tariffs from network segment have aligned with predictions for FY2015, however they are expected to increase due to finalisation of UT4 Access (a railroad line) undertaking. The volume throughput through CQNC (a railroad line) undertaking has set a record in first half of the fiscal year 2015, with an increase of 7% on year-to-year basis. The ‘network’ segment also maintained the reliability benchmarks set in FY2014.



Capital Expenditures (Source: Company reports)

For ‘commercial and marketing’ segment, the underlying EBIT was down by 1% or $21 million, which can largely be attributed to decline in freight revenue of $41 million. Iron ore revenue also declined by $15 million, which is a decline of 14%. Coal revenue increased by $12 million and there was $23 million improvement in operating and depreciation costs in the segment.

The company’s interim dividend was declared at 10.1 cps, up by 26% as compared to first half of the fiscal year 2014. At this rate, the dividend payout of the company is maintained at a healthy 70%. The company announced a market buyback program in November 2014. The company has purchased and cancelled 13.4 million shares as on 31 December 2014. The Return on invested capital in the first half of the fiscal year 2015 was at 9.4%. Return on Invested capital improvement reflects improved capital allocation and continued improvement in rolling stock productivity. AZJ’s gearing during the period increased by 2.8ppt to 30.7%, which reflects the acquisiton of Aquilia and capital investment in property plant and equipment. The company saw adverse movement in loss time injury frequency rate (LTIFR) and Total recordable injury frequencey rate (TRIFR) reflected a fatal road accident in Central Queensland in October 2014.


Quarterly Results_Above Rail Volumes (Source: Company Reports)

March quarter coal volumes were reported to be 49.6mt, indicative of 2% on the prior corresponding period. It has been reported that weather extremities in NSW may affect 4Q15 coal volumes.

The recent market update entailed West Pilbara Iron ore project related discussions with Baosteel Resources, Aquila Resources, POSCO and AMCI. An initial, non-binding indicative ±25% tariff was delivered for the mine-to-ship supply chain services as per the infrastructure framework agreement at the end of March 2015. As per the revised project assessment schedule, extension of AZJ’s period of exclusivity to develop an infrastructure solution has been done until 30 April 2016; an indicative and non-binding ±15% tariff is to be provided by AZJ by 30 November 2015; plans about definitive feasibility studies to be determined by December 2015; and review of the studies and binding tariff to be done in 2016.


AURIZON Daily Chart (Source - Thomson Reuters) 

Then the company has been able to secure a long-term performance based contract with Caledon Coal for the haulage of up to four million tonnes per annum (mtpa) of coal with ramp-up profile from Cook mine in Central Queensland to the new Wiggins Island Coal Export Terminal. The contract runs for 11 years from May 2015 to June 2026. AZJ quite recently also announced that it would terminate 12 existing enterprise agreements in Queensland.

The company is currently trading at a Price to Earnings multiple of around 23 and a dividend yield of ~4%. At this price, the stock is trading close to its 52 week high of $5.150.

Given the ability of the company to follow through on its strategy and with further operational improvements in sight, we put a BUY recommendation for this stock at the current price of $4.88.