Aurizon: Unloading after a good run
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 03 December 2015, 9:42 AM
- Sectors Covered:
- Infrastructure, Utilities, Banks
We think the market is being too bullish on the outlook for Aurizon's (AZJ) revenue growth
and EBIT margins.
Recognition of this, combined with concerns related to nonrenewal
or early termination of haulage contracts given end product market
weakness, is likely to put downward pressure on AZJ’s share price.
Expect consensus downgrades over time
We have revised down our EBIT forecasts by 2-10% across FY16-19F given challenging
end product markets.
We believe consensus forecasts for AZJ's earnings are too bullish
and will likely reduce over time as the market adopts a more benign view on the
company's revenue growth outlook and aligns EBIT margin expectations closer to
management targets. Our EBIT forecasts sit 2-5% below consensus for FY16-17F.
End product markets remain under pressure
Coal and iron ore export prices continue to trend downwards. With material expiry of
coal haulage contracts in the early years of the next decade, we are concerned that
continuation of weak prices may result in early contract termination or non-renewal of
contracts.
General freight and bulk freight markets remain under continued pressure.
Given this backdrop we have materially reduced our revenue forecasts. In such an
environment, AZJ’s cost-out program remains critical to delivering earnings growth.
Dividends and buyback
We believe AZJ’s share price has surged recently as a result of speculation that
additional capital management will be undertaken (and potentially also due to scarcity of
investable alternatives as a result of the AIO takeover). Based on a 90% dividend payout
ratio, AZJ is already devouring all of its FY16-17F cashflow with dividends.
Our forecasts
now assume continuation of the buyback, which helps to offset the negative EPS impact
of our EBIT forecast downgrades while maintaining credit metrics within the range
required of the current credit ratings. While there is capacity within AZJ’s credit metrics
to distribute more cash to shareholders we don’t believe this will be materially value
accretive.
Recommendation
Our target price reduces - Morgans clients can view the full report to access the target price. The valuation reduction arises
from our forecast changes and segment allocations, offset by a six month valuation roll
forward to December 2016.
Given 9% potential price downside we recommend investors
Reduce their holdings in AZJ.
More information
Morgans clients can access the full Aurizon report by logging in. If you are interested in finding out more, please contact your nearest Morgans office.
Disclaimer: Analyst owns shares.
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.