Morningstar | Aurizon’s Rail Network Agreement Likely to be Approved by Late 2019
Nothing material was announced at narrow-moat-rated Aurizon’s update and we maintain our AUD 4.00 per share fair value estimate. After the recent strong rally, the stock is overvalued.The update focused on the recently proposed agreement with coal mining customers on Aurizon’s Central Queensland rail network. If authorised, this agreement will supersede an unfavourable regulatory decision, known as UT5. We expect approval from the regulator in late 2019. Over 90% of customers have formally supported the proposal and the remainder appear happy to go along with it. We also understand the regulator, the government, the ports and the haulage companies are happy with it. As such, it should be accepted.
There are three benefits for Aurizon: 1) slightly higher returns than under UT5; 2) long-term certainty with returns locked in to 2027; and 3) the ability to hang on to benefits from cost savings for longer than under regulation. The latter is interesting. Under regulation, earnings would only benefit from cost savings until the next regulatory reset--usually every five years--when the regulator would reduce Aurizon’s revenue to offset cost savings and ensure the firm isn’t making more profit than is fair. This is a poor incentive to improve efficiencies and make painful redundancies. Under the proposed new agreement, Aurizon will benefit from cost savings until the contract ends in 2027. Efficiency improvements could include automating systems, improving schedules and improving train paths.
The main negative for Aurizon is that if network availability drops below target levels, measured on a yearly basis, it would be forced to pay material rebates to customers. With significant fixed costs in the network business, the impact on earnings could be large. However, the rebate mechanism only applies to issues under Aurizon’s control and management is confident in its ability to catch up deficiencies before incurring penalties. We’re not overly concerned on this issue.
Aurizon Holdings is engaged in integrated heavy haul freight railway operation; rail transportation of coal from mine to port for export markets; bulk, general and containerised freight businesses; and rail services activities. Co. has three segments: Network, which is engaged in the provision of access to, and operation and management of, the Central Queensland Coal Network; Commercial & Marketing, which is engaged in the commercial negotiation of sales contracts and customer relationship management; as well as Operations, which is engaged in the national delivery of various coal, iron ore, bulk and intermodal haulage services, and in the maintenance of rollingstock fleet assets.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.