Aurizon Holdings (AZJ)
BUY

Transitional quality

 14 Aug 2023
Sector: Industrials

RESULTS

Need To Know

  • FY23 EBITDA in line with pre-guided results. Dividend missed, only 60% franked.
  • Detail weak across operating cash flow, net interest costs, and higher gearing.  
  • Outlook guidance for FY24 volumes and EBITDA is unchanged from June Investor Day.

Investment Implications

FY23 EBITDA $1.43bn in-line with consensus.

Dividend 15cps vs 16.5cps consensus. 2H23 franking 60%, which consensus is likely to adopt for FY24E.

Net interest costs $230m vs ~$200m consensus. FY24 guided to $300m, well ahead of consensus $265m.

Gearing 54% vs 41% on One Rail Australia acquisition higher CAPEX spend in FY23m. CAPEX was $770m in FY23, up from $532m in FY22. FY24 CAPEX guidance stands at $850-960m ($250-300m earmarked for growth initiatives)

FY23 free cash flow $297m (consensus $330m), which is running at less than half the $500-650m through cycle target AZJ guided earlier this year.

Within the details of the result, Network earnings were better than expected, whilst Above Rail was softer impacted by wage costs, wet weather, and derailments.

Overall, we see this as a compositionally weaker result. The dividend miss/lower franking into FY24 detracts from near-term income appeal.  Higher interest costs can be clawed back through the existing regulatory process.

AZJ commented that early feedback on the proposed inland rail option from Darwin to East Coast has been encouraging, which potential partners/customers attracted to potential efficiency savings of 5-7 days.

We expect flat FY24E EBITDA earnings revisions, whilst small trimming to the FY24 dividend estimates by consensus is likely.

Investment View

We believe the market is too bearish on AZJ and is capitalising on the soft weather-induced volumes of 2022/23 into the future. Poor operational performance has been coupled with higher bond yields and ESG concerns. We see the prospects of >25% earnings dividend rebound FY24E.

To be sure, AZJ faces a long-term existential crisis in coal volumes declining over the long term. We don’t see coal volumes declining this decade. ESG concerns overhang AZJ with coal-linked revenues and is part of the reason AZJ trades on a depressed multiple.

Evidence of commercial success in the Bulk earnings and proving up the Inland Rail business remain important catalysts for  AZJ.

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Stock Overview

Share Price

Company Overview

AZJ is a rail freight operator in Australia. It operates in three segments: Network, Coal, and Bulk. The Network segment provides access and maintenance services for the Central Queensland Coal Network (CQCN).

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