Company Reports

We downgrade Aurizon Holdings’ moat rating to no-moat from narrow following a periodic review by Morningstar’s moat committee. While we maintain Aurizon’s underlying asset quality is good, forecast excess returns are slim, and investments in new businesses to diversify away from coal weigh on future returns. We think there is significant uncertainty about whether the company can generate returns on invested capital above our estimate of the company’s cost of capital a decade from now, hence the no-moat rating. We estimate the firm’s return on invested capital was 6.1% in fiscal 2024 and think it will remain below the firm’s 7.3% weighted average cost of capital for at least the medium term.

Aurizon's rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical and competitive. Downward pressure is likely to remain on haulage rates and volumes as overcapacity drives intense competition.

Narrow-moat Aurizon’s fiscal 2024 EBITDA increased 14% to AUD 1.62 billion on solid growth across all divisions. While it was a good result, EBITDA was 3% below our expectations mainly because of a soft second-half performance in coal haulage. Similarly, the midpoint of fiscal 2025 EBITDA guidance of AUD 1.66 million-AUD 1.74 million is 4% below our prior expectations and we downgrade our forecast in line with this.

Aurizon is a narrow-moat business operating in efficiently scaled markets. Its rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical. Coal prices have recovered but downward pressure is likely to remain on haulage rates and volumes due to intense competition.

Aurizon is a narrow-moat business operating in efficiently scaled markets. Its rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical. Coal prices have recovered but downward pressure is likely to remain on haulage rates and volumes due to intense competition.

Narrow-moat Aurizon remains attractively priced, trading at a 23% discount to our fair value estimate, on a forecast fiscal 2025 P/E ratio of 13 and a mostly franked dividend yield of 6.6%. We upgrade our fiscal 2024 EBITDA forecast by 2% to AUD 1.67 billion, toward the top of the AUD 1.59-AUD 1.68 billion guidance range on a slightly-better-than-expected rebound in coal export volumes. Longer-term forecasts are largely unchanged, and we maintain our AUD 4.70 per share fair value estimate. We lower our uncertainty rating to Medium from High, given a solid earnings recovery across haulage and the regulated rail track, as well as more comfort around the financial health of coal mining customers and the long-term outlook for Australian coal exports to Asia.

Aurizon is a narrow-moat business operating in efficiently scaled markets. Its rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical. Coal prices have recovered but downward pressure is likely to remain on haulage rates and volumes due to intense competition.

Narrow-moat-rated Aurizon reported a strong first-half result on higher tariffs and, to a lesser extent, volumes. Management expects a softer second half because of wet weather impacts in recent weeks and other minor issues and maintained full-year earnings guidance. We leave our earnings forecasts unchanged and maintain our AUD 4.70 fair value estimate. We continue to think the stock is attractive, trading on a forward P/E of 16 and with solid growth potential from recovering coal haulage volumes and investment in noncoal bulk haulage. The firm offers a forecast 4.6% mostly franked dividend yield, with upside from earnings growth and a likely higher payout ratio from fiscal 2025 as financial health strengthens.

Narrow-moat-rated Aurizon screens as undervalued, trading at a 25% discount to our unchanged AUD 4.70 fair value estimate. It trades on a forecast fiscal 2024 P/E ratio of 15, offers a mostly franked yield of 5%, and has a solid medium-term earnings growth outlook. Management guides to underlying EBITDA of AUD 1.59 billion to AUD 1.68 billion in fiscal 2024, representing a 14% uplift at the midpoint. This guidance was reconfirmed at the annual general meeting in October. We expect solid growth to continue for the medium term and forecast an EBITDA CAGR of 7% in the next five years.

Narrow-moat-rated Aurizon did well to keep earnings flat in fiscal 2021 despite lower coal export volumes. Underlying EBITDA was AUD 1,482 million and underlying NPAT was 533 million, both a couple of percent above our expectations. We expect haulage volumes to pick up in fiscal 2022 but much of the benefit will be offset by falling tariffs and nonrecurrence of some network revenue. Guidance is for fiscal 2022 EBITDA of AUD 1,425 to 1,500 million. We downgrade our 2022 forecast 1% to AUD 1,470 million. Our long-term forecasts are largely unchanged. Aurizon's share price is improving but it still looks decent value, trading 14% below our unchanged AUD 4.70 fair value estimate.

Narrow-moat-rated Aurizon's reported first-half fiscal 2021 underlying EBIT of AUD 454 million and underlying NPAT of AUD 267 million. The result was flat on the previous corresponding period as recovery of historical Wiggins Island Rail Project, or WIRP, fees and a stronger bulk haulage performance offset lower coal haulage volumes, which were impacted by China rejecting shipments of Australian coal. Management upgraded full-year EBIT guidance by 4% to AUD 870 to 910 million and we upgrade our forecast similarly to AUD 898 million.

Aurizon is a narrow-moat business operating in efficiently scaled markets. Its rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical. Coal prices have recovered but downward pressure is likely to remain on haulage rates and volumes.

Aurizon is a narrow-moat business operating in efficiently scaled markets. Its rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical. Coal prices have weakened again, increasing risk to haulage rates and volumes.