ASX:AZJ
Aurizon Holdings Ltd
Investment Summary
The fund managers believe Aurizon Holdings Ltd (AZJ) offers strong investment potential due to its **monopoly position in Queensland freight** and **stable earnings profile**. They highlight **attractive dividend yields,** almost **9% gross,** and share buybacks at **5% p.a.** as incentives. In their opinion, the concerns regarding coal, comprising **40% of earnings,** are overstated; even a downturn in coal haulage would be countered by **increased third-party access** to rail lines. The company's **regulated earnings** are expected to grow with rising interest rates, while **improved operational efficiencies** and **contract wins** should bolster unregulated earnings. The fund managers also point out that **gearing levels are improving,** allowing potential for higher capital returns through dividends and buybacks. With current valuations considered cheap relative to underlying fundamentals, they anticipate a convergence towards a **true value of approximately $6.50** per share, representing a compelling opportunity for investors.
Commentary From The Managers
Endeavor Asset Management
31 July 2024
$3.72
- Endeavor Asset Management re-entered an investment in Aurizon Holdings (AZJ), having successfully owned it on-and-off previously.
- Expectations for FY24 results are optimistic, with forecasts suggesting performance better than anticipated.
- Gearing levels are expected to improve, surpassing the company's target.
- This improvement is projected to enable increased capital returns to shareholders through buybacks and partially-franked dividends.
- Endeavor Asset Management believes the market will positively respond to these developments.
- Current valuations provide downside protection, with potential to monetize and sell portions of its assets.
- The fund manager anticipates that stable regulated assets could achieve a higher multiple than AZJ's current trading metrics.
- Current metrics include a sub-7x FY25 EBITDA and a 6.6% yield.
L1 Capital
31 Dec 2023
$3.82
- Aurizon is the leading rail operator in Australia with over 5,000km of network rail assets.
- Holds the largest haulage operations in Australia across coal, bulk commodities, and containerised freight.
- L1 Capital identifies three key drivers for the company’s earnings outlook:
- Regulatory network earnings expected to increase as it enters a new regulatory period.
- Volume growth from contract wins and reduced weather impacts.
- Focus on operational efficiencies to enhance performance.
- This earnings growth, along with a reduction in capital expenditure and improvement in payout ratio, is expected to drive steady increases in dividends.
Cooper Investors
30 June 2023
$3.92
- Cooper Investors built a position in Aurizon (AZJ) during the quarter.
- The investment is supported by improving operating trends and attractive valuation.
- Regulated earnings (below rail coal) are expected to see strong near-term growth due to higher interest rates.
- Unregulated earnings (above rail coal and bulk) should rebound from higher volumes and better margins.
- Coal accounted for 86% of Aurizon's earnings in 1H23, presenting material near-term growth potential.
- Regulated returns for below rail business are largely known for FY24-27.
- Coal haulage volumes have been affected by above-average rainfall but are expected to improve with the El Niño event.
- Aurizon's investment in bulk aims to mitigate medium to long-term coal headwinds.
- Bulk contract returns are projected to be above the company’s cost of capital.
- Bulk is seen as a partial hedge for coal during the energy transition, given the demand for critical minerals.
Collins St Asset Management
31 Dec 2020
$3.90
- Collins St Asset Management identifies Aurizon Holdings Ltd as a potentially strong investment due to its simplicity and stability.
- Aurizon holds a monopoly position in Queensland freight, which underpins its earnings.
- The company showcases a highly stable earnings profile and an excellent return on equity.
- Management has been actively buying back shares at approximately 5% per annum.
- It offers an attractive dividend yield of almost 9% gross.
- Recent market sentiment towards coal-related businesses has created a buying opportunity for Aurizon.
- Coal haulage constitutes about 40% of earnings, with only half from thermal coal.
- 50% of earnings are generated from third-party access to its rail lines.
- The concerns surrounding the coal business are viewed as over-blown by Collins St Asset Management.
- A reduction in coal haulage could be offset by an increase in third-party access.
- At a price point of $3.70, the fundamentals indicate the company is undervalued, with a target price estimated at $6.50.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.