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Aurizon’s pulling its horns in and shareholders are happy

Andrew Main
Wednesday, August 14, 2019

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Memo to corporate treasurers: if you want to keep shareholders happy, there’s nothing quite like an open ended share buyback, as shown this week by rail haulier Aurizon.

The company formerly known as QR National turned in an annual result that was down in every major respect, starting with a 15% drop in statutory net profit and concluding with a 12% cut in total annual dividend.

And the share market reaction? AZJ shares climbed 17 cents or almost 3% during trading on Monday to a new high of $5.96, where it stayed overnight. The stock price has had a solid run in the last 12 months, climbing 28% and that was before this week’s jump.

Management announced it would buy back up to $300 million worth of stock  over the next year on market, at prices and on dates of its own choosing.

They wouldn’t quite put it this way, but that proposal basically puts a floor under the stock.

In terms of reducing the company’s capital it’s pretty small beer: my calculations are that the company’s buying back 2.5% of its $1.99 billion capital.

But what it does say is that the company doesn’t want to do anything silly with spare capital, preferring instead to hand it back to shareholders.

That’s a significant plus because almost every time Aurizon has diversified away from its core business of hauling metallurgical coal around, it’s done less well.

To be fair to Aurizon, it also beat consensus estimates for its all-important underlying earnings before interest and tax (EBIT), coming in at $829 million against expectations of $799 million. That was despite the latest result being 12% below the previous year’s number of $941 million.

CEO Andrew Harding said on Monday that it’s decided not to split its “above rail” and “below rail” operations, following a year-long strategic review, preferring to restructure the two divisions so they each manage their own debt arrangements.

It had a number of regulatory and legal wins, most particularly a resolution in May of its UT5 dispute with the Queensland Competition Authority over how much it could charge the users of its rail network.

It also finally got a $20 million payment out of former client Clive Palmer in relation to haulage done for his Queensland Nickel operation. The bill he was sent was for $88 million but Aurizon had the whole sum carried as a bad debt, so it’s a win of sorts. To judge by recent courtroom action, getting a payment of any size out of Clive Palmer is something of an achievement.

I’ve got form with Aurizon, having written about it pre its 2010 float and noticed that it was far more popular with retail investors than institutions.

The float was subject to a bookbuild and it opened at $2.54, just a tad above the retail investors’ price of $2.45, against a background of professional investors saying it was going to be something of a dud.

It turned out that some of the darker muttering around the float had come from rival operator Asciano, which operated the Pacific National rail haulier. The latter was subsequently sold in August 2016 to a consortium of international pension funds after a complex takeover that provided clear evidence that global fund managers simply adore anything that even looks like a steady infrastructure play. It’s arguable whether it really is, given its history of hither-and-yon expansion, but they are welcome to that view.

While it’s no firecracker, the Mums and Dads who stayed aboard the train from float date have doubled their money, and I haven’t included dividends.

Those grew until this year at around 27% a year since the first skinny dividend of 0.037 cents in 2011, the latest being an effective annual dividend of 23.8 cents, down 12% from the FY18 level of 27.1 cents.

The company pays out 100% of its profits in dividends, which are 70% franked.

Which suggests that this company is really good to its shareholders, although it’s a worry that it is quite so lavish with its earnings.

So what’s the outlook for Aurizon? Mixed.

For a start, it lost two of its biggest shareholders, Unisuper and the Children’s Fund in the last six months. That may explain why the share price has kicked up sharply in recent weeks, post their exit, to new highs.

I understand they sold out for environmental reasons and there is not a lot a coal haulier can say to defend their position nowadays.

Aurizon started out almost exclusively hauling metallurgical coal, of the sort used to make steel around the world, from the Bowen basin to the Queensland coast.

The Sunshine State has the best quality met coal (also called coking coal) in the world, and although a lot of protesters don’t differentiate between different types of coal, the market certainly does.

And in simple terms, most big investors and banks understand the need for metallurgical coal but are less enamoured nowadays of steaming coal as used in electric power generation, and whose eventual demise keeps being predicted.

Aurizon’s problem is that nowadays it actually carries more steaming coal than metallurgical coal, by a ratio of 55 to 45%. Why?

Because the haulier expanded its operations into the Hunter Valley in New South Wales some years ago and most of the coal there is steaming coal, so Aurizon has basically cut off its ability to toot the whistle about its met coal core business.

And it’s fair to say there’s a major question mark hanging over steaming coal’s future, and with it, Aurizon’s chances of maintaining its coal tonnage numbers.

Fortunately Aurizon makes almost as much from running railway networks as running trains, which is a lot like the apocryphal entrepreneur in the California gold rush of 1849 who did much better than most of the miners, by selling  shovels.  

Conclusion? Aurizon may be entering a purple patch, as long as it doesn’t expand into unknown territory.

Published: Wednesday, August 14, 2019


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