Aurizon Holdings: WIRP to the rescue

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
16 February 2021, 1:00 PM
Sectors Covered:
Infrastructure, Utilities

Key points

  • The interim result and dividend was supported by a one-off revenue true-up.
  • FY21-23F EBIT adjusted by -3% to +6%. Long-term earnings downgrade due to the weaker coal earnings partly offset by bulk growth and lower overheads.
  • Price target declines (Morgans clients can login to view detailed reports and price targets) due to forecast changes. ADD retained.
  • Next key events are the Investor Day in June and above rail quarterly in mid-April.

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The detail

How did the company perform in 1H21?

EBIT declined -11% on pcp (or flat including the one-off $49m World Interest Rate Probability (WIRP) fee true-up), 3% better than we had expected.

The key driver was growth in Bulk (+39% on pcp, new volumes and revenue) and decline in overheads (-29%), while lower volumes affected Coal (-17%, pricing pressure) and Network (-20% ex WIRP fees).

EPS rose 4% on pcp, partly supported by the share buyback.

Free cashflow (15cps) benefited from strong cash conversion (>100% EBITDA) partly offset by a step-up in M&A activity.

What's the outlook for earnings?

Revised FY21 EBIT guidance is $870-910m, or $830-870m ex WIRP fees (-2% decline on pcp at the mid-point); previous guidance was $830-880m.

We now target FY21 EBIT of $905m.

We have upgraded our Network (WIRP fees, stronger cost-out), Bulk (faster growth with higher margins), and corporate overhead (stabilising at lower level) forecasts, but materially downgraded Coal (first-time disclosure of the -5%/13mtpa drop in contracted coal haulage from FY22, pricing pressures).

We now expect FY22-23F to deliver mild earnings growth (growth in Bulk and Network vs decline in Coal), before a decline in FY24F as certain WACC parameters reset on the Network revenues.

Per share metrics grow faster than profits because of the assumed ongoing share buyback.

Capital management considerations?

Aurizon Holdings (ASX:AZJ) says it has ~$900m of excess capital that it can deploy (inclusive of Acacia Ridge net sale proceeds).

While we assume this continues to be used for share buybacks, investment opportunities seem to be increasing for AZJ.

It has purchased another small Bulk-related port facility (this time in Newcastle) with the aim of offering integrated port-rail services to customers.

In addition, it is considering the far more sizable M&A opportunity of One Rail (Hunter Valley coal, South Australia and NT bulk).

What's the outlook for dividends?

Continuation of 100% earnings payout delivered a 24% increase in 1H21 DPS (70% franked).

We think AZJ can generate an average 30cps/yr across FY21-23F, implying a cash yield of 7.5% at current prices.

However, the Federal Budget's allowance for immediate capex expensing on projects completed before July-22 may reduce tax payable, and thus the franking credits that can be attached to the dividends.

What's the stock worth?

Our sum-of-the-parts DCF valuation generates a share price target of (Clients login to view). 

This implies 1.2x EV/RAB for Network and 8.6x EV/EBITDA for Non-Network.

The disconnect between our valuation and the share price can be partly explained by the anti-coal thematic (impacts long-term value considerations) as well as negative sentiment arising from the China coal import restrictions.

We think the share price implies an overly cheap 1.1x EV/RAB for Network and 8x EV/EBITDA for Non-Network.

Add rating retained.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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