EUR 850.00 For Business Accounts Only

Morningstar | Aurizon’s Third Quarter Improves as Expected

After a soft first-half fiscal 2019, narrow-moat rated Aurizon’s coal volumes improved 4% in the third quarter, despite some delays exporting coal to China. Coal volumes benefited from strong export demand, given healthy coal prices and new contracts. Volumes would have been even better if not for Aurizon workers taking industrial action and poor weather. The main negative, which was expected thanks to good disclosure from management, was the 20% fall in bulk volumes following cessation of iron ore haulage contracts for Cliffs and Mount Gibson in June 2018 and January 2019, respectively. For the fiscal year to date, coal volumes are flat and bulk volumes are down 18%. This is broadly in line with our prior expectations and we maintain our earnings forecasts and AUD 3.80 fair value estimate. At current prices, Aurizon is marginally overvalued.

Whether the delays getting coal into China relate to a diplomatic stoush, are designed to protect jobs in the Chinese coal industry, or are to appease President Trump by increasing imports from the U.S., the impact hasn’t been particularly meaningful. Australian coal is still finding buyers, and even if miners take a small hit on price, that won’t impact Aurizon. Nonetheless, it highlights one of our concerns with Aurizon--that it is almost exclusively reliant on Australia’s coal exports. This lack of diversification leaves the firm vulnerable to a downturn or other potential issues in the coal industry.

Aurizon is reviewing its legal and capital structure. Given the regulatory headwinds in the rail network business, we think it would make sense to remove the separation between the network and the haulage business. This would likely make lenders more comfortable and should lower borrowing costs. While the firm’s financial position appears sound, gearing is above management’s target and thus a small equity raising at the same time as the restructure wouldn’t be a surprise.