COMPANY DATA

Source: Bloomberg

Company Description

INVESTMENT SUMMARY

• Higher (and stabilizing) commodity prices should translate into improving volumes.
• Steady momentum with the transformation program expected to achieve benefits (management achieved its $380m transformation target).
• ACCC has blocked the sale of Queensland Intermodal and Acacia Ridge Terminal. Proceedings are on foot in the Federal Court.
• On-market buyback of A$300m now complete.
• Attractive dividend yield.
• Solid free cash flow (despite free cash flow decreasing from $704m in FY17 to $669 in FY18).

• Significant decline in commodity prices leading to mine closures or reduce volumes from customers. We see potential declines in iron ore prices.
• Structural decline in some commodities (e.g. coal).
• High costs impacting margins.
• Contract repricing resulting in longer term revenue loss.
• Pricing pressure to increase.
• Cut in dividends.

Figure 1: AZJ EBIT by segment

Source: FY18 Company reports

Figure 2: AZJ Rail Haulage Operation

Source: Company

• Network (~50% of EBIT). EBIT declined marginally to $480.6m in FY2018, with reductions in costs ($51.6m) offset by decreased revenue ($43.4m), mainly due to the non-recurrence of UT4 true-up of regulatory revenue in FY2017 and increased depreciation ($8.5m).
• Coal (~45% of EBIT). Underlying EBIT increased to $428.6m, up +2% on increased volumes and ongoing transformation program benefits which offset higher costs. Interestingly, as a market update, management pointed out “average hard coking coal price in FY2018 was US$204/t (+7% on the previous year), driven by continued growth in steel production in China and India… China crude steel production achieved a record 870mt, increasing by +6%. India recorded its 29th consecutive month in June 2018 of year-on-year growth in steel production… Given upward pressure on coal prices, opportunistic supply from the U.S and Indonesia continued to be incentivised to the market… metallurgical coal exports from the U.S lifted +33% and total coal export volume from Indonesia (almost entirely thermal coal) increased by +7%”.
• Bulk (~5% of EBIT). EBIT increased $64.5m to $50.1m, on transformation program benefits and lower net depreciation from impairments in FY2017 partly offset by lower volumes. Management commentary on iron ore was interesting in pointing out that “average iron ore price in FY2018 was US$69.0/t, remaining relatively flat against the previous year’s average of US$69.4/t. China, the world’s largest steel producer (and importer of iron ore) continued to drive demand, with hot metal production growing +2% in the 12 months to June 2018, against a backdrop of supply ramping up from Vale’s S11D project in Brazil and Roy Hill in the Pilbara. China’s demand shift towards higher grade iron ore continued during FY2018, with prices for lower grade iron ore products remaining at historically lower levels compared to the 62% Fe benchmark price… China’s increasing focus on reducing pollution and environmental regulation is favouring the use of higher grade ores”.

Figure 3: AZJ Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

Aurizon Holdings Ltd (AZJ) operates an integrated heavy haul freight railway in Australia. It transports various commodities, such as mining, agricultural, industrial and retail products; and retail goods and groceries across small and big towns and cities, as well as coal and iron ore. The Company also operates and manages the Central Queensland Coal Network that consists of approximately 2,670 kilometres of track network; and provides various specialist services in rail design, engineering, construction, management, and maintenance, as well as offers supply chain solutions. In addition, it transports bulk freight for customers in the resources, manufacturing, and primary industries sectors. The Company was formerly known as QR National Limited and changed its name to Aurizon Holdings Limited in December 2012. AZJ is headquartered in Brisbane, Australia.