The company is trying to diversify away from coal haulage, announcing in late October that it had
bought freight rail group OneRail Australia, which was formerly known as Genesee & Wyoming Australia, for $2.35 billion.
The OneRail acquisition is complex. One Rail’s operations include coal haulage (mostly thermal coal) in NSW and Queensland, as well as bulk haulage businesses that shift grain, copper, iron ore, copper and other commodities in several states.
Aurizon is planning to sell, or spin off, the coal haulage operations and keep the bulk haulage businesses to reduce its financial exposure to the coal markets and boost its exposure to minerals used in batteries for electric vehicles, such as manganese, and other “new economy” commodities such as copper.
Aurizon chief executive Andrew Harding argues that there are long-term growth opportunities for the company in these commodities, as well as grain and other agricultural goods.
He also argues that selling or spinning off OneRail’s coal haulage operations, known as East Coal Rail, would be “very manageable”.
“East Coast Rail is a very good business, with strong cash flows and long-term take or pay contracts,” Mr Harding said.
OneRail generates some of its income from operating the Tarcoola to Darwin Railway, which runs from South Australia to the Northern Territory.
Sale comes with issues
But some analysts are worried that Aurizon will not be able to find a buyer for One Rail’s coal businesses, with RBC Capital Markets analyst Owen Birrell arguing that the rail group would be a “forced seller of an unwanted coal exposed asset.”
Mr Birrell said Aurizon may have difficulty getting a price for the OneRail coal businesses that matches the multiple of about 10.5 times 2021 forecast earnings it paid for the group, and that if the OneRail businesses were spun off, they would trade at or below a multiple of 7.5 times earnings, “passing the devaluation to existing shareholders”.
Mr Birrell cut his price target for Aurizon last month to $3.30 from $3.60 and reduced his rating on the company to “underperform”.
He has also warned that Aurizon’s use of debt to pay for the OneRail acquisition would limit how much cash Aurizon could return to shareholders.
Moody’s Investors Service, which rates Aurizon at Baa1, has said that while the acquisition was good overall for the rail group’s credit ratings – because it allows the company to expand its bulk haulage operations – the debt taken on with the purchase would weaken its balance sheet.
Aurizon told shareholders after revealing its plans to buy OneRail that dividends were likely to be paid “at the lower end” of its forecast payout range (between 70 and 100 per cent of underlying net profit) for the next one or two years.
But some investors and analysts are expecting Aurizon to benefit from the acquisition.
Anthony Moulder, analyst at Jefferies, expects the OneRail coal businesses to be demerged, and said that if this happened, investors would benefit from a cash-generating company.
Mr Moulder also argued that OneRail’s bulk business would help expand Aurizon’s bulk operations.
“It is this growth, and the ability to repurpose locomotives and wagons hauling thermal coal into the bulk business, that will help accelerate the shrinking of thermal’s proportion of Aurizon’s haulage revenue,” he said.
Jefferies rates Aurizon a “buy” with a target price of $5.23.
Moving on from diesel
The competition watchdog is
reviewing the OneRail acquisition, including examining whether the proposed sale of OneRail’s coal businesses would be likely to attract a suitable purchaser or whether a demerger would create “a viable, effective and long-term competitor.” It plans to announce an initial decision by early March
Aurizon has lost international investors, but the number of retail shareholders on the register is running at about 20 per cent by value, the highest level since its listing, according to the company.
Of the remaining institutional shareholders, about two-thirds are local institutions and the rest are from overseas.
To help slash carbon emissions, Aurizon is researching battery-powered and hydrogen-powered trains.
It has signed an agreement with global mining group Anglo American to explore the use of its hydrogen fuel cell and battery hybrid power systems in freight locomotives.
A feasibility study will examine the potential use of Anglo American’s hydrogen power technology on the 180-kilometre Moura rail corridor from Dawson in Queensland to the port of Gladstone and the 977-kilometre Mt Isa rail corridor from Mt Isa to the port of Townsville. Aurizon currently uses diesel-fueled locomotives.
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