Tag: Commodities

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Rio Tinto’s most recent profit report

Investment Thesis

  • One of the largest miners in the world with a competitive cost structure.
  • Tier 1 assets globally, which are difficult to replicate. 
  • Highly cash generative assets with attractive free cash flow profile. 
  • Shareholder return focused – ongoing capital management initiatives.  
  • Commodities price surprises on the upside (potential China stimulus to combat Coronavirus impact). 
  • Strong balance sheet position.
  • Electrification and light-weighting trends in automobile industry provide long-term growth runway for aluminium demand.

Key Risks

We see the following key risks to our investment thesis:

  • Further deterioration in global macro-economic conditions.
  • Deterioration in global iron ore/aluminium supply & demand equation.
  • Production delay or unscheduled site shutdown.
  • Natural disasters such as Tropical Cyclone Veronica.
  • Unfavourable movements in AUD/USD.
  • Company not achieving its productivity gain targets. 

1H21 results summary

Relative to the pcp (1H20), and in US$: 

  • Net cash generated from operating activities of $13.7bn was +143% higher on higher pricing for iron ore, aluminium, and copper. 
  • $10.2bn free cash flow reflected stronger operating cash flows partially offset by a +24% rise in Capex of $3.3bn (driven by higher replacement and development capital as the Company ramp up its projects).
  • $21.0bn underlying EBITDA was 118% higher (on 61% margin). 
  • $12.2bn underlying earnings (reflecting underlying EPS of 751.9cps) was +156% (with underlying effective tax rate of 29%). 
  • The Board declared cash return of 561cps, broken into interim dividend of 376cps and special dividend of 185cps. Payout is 75% of underlying earnings. (6) Balance sheet was stronger with net cash of $3.1bn versus net debt of $0.7bn in the pcp.

Company Description  

Rio Tinto Limited (RIO) is an international mining company with operations in Australia, Africa, the Americas, Europe and Asia. RIO has interests in mining for aluminium, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium dioxide feedstock and diamonds.  

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Commodities Trading Ideas & Charts

Whitehaven Coal is cheap in spite of soaring thermal coal futures

The portfolio of export-orientated mines is based in New South Wales, Australia. Salable coal production expanded from 10 million tonnes in fiscal 2014 to about 15 million tonnes in fiscal 2021, largely due to the ramp-up of Maules Creek and the expansion of the Narrabri mine. Equity output is expected to grow to approach 19 million tonnes by fiscal 2023. 

Whitehaven focused on increasing resources, reserves, and production through the boom. Maules Creek was developed despite a challenging external environment, and the subsequent ramp-up and improved coal prices from 2016 saw the weak balance sheet quickly repaired. Favourable coal prices are critical to generating excess long-term returns, but on this front we are circumspect. However, from near-break even profit levels in fiscal 2020, we see material longer-term earnings upside as coal prices recover.

Financial Strength:

The last traded price of the Whitehaven Coal is AUD 3.30 and the fair value as per the analysts is AUD 4.30, which shows that the share is undervalued.

Whitehaven’s financial position is relatively weak. The balance sheet deteriorated with the rapid decline in the coal price in fiscal 2020 and the payment of about AUD 300 million of dividends declared with the final result from fiscal 2019. The speed of the decline in the coal price, the production issues at Maules Creek and Narrabri, and the impact on unit cost drove a spike in net debt to about AUD 820 million at end 2020. At this level, Whitehaven is carrying more debt and leverage than most of its peers. The company had liquidity of about AUD 410 million at end 2020 with about AUD 100 million cash and AUD 310 million remaining undrawn on the company’s AUD 1 billion debt facility, which matures in July 2023.

Bulls Say:

  • It is increasingly difficult for new coal mines to gain approval. This could dampen future supply to the benefit of existing coal producers with long life. 
  • Whitehaven’s Maules Creek and Narrabri mines will likely provide a core of low-cost production, while Maules Creek brings a meaningful proportion of metallurgical coal. 
  • The company is development rich with projects including the Vickery and Winchester South deposits. This underpins a strong pipeline of production growth, including some coking coal, for Whitehaven for years to come.

Company Profile:

Whitehaven Coal is a large Australian independent thermal and semisoft metallurgical coal miner with several mines in the Gunnedah Basin, New South Wales. It also owns the large undeveloped Vickery and Winchester South deposits in New South Wales and Queensland respectively. Coal is railed to the port of Newcastle for export to Asian customers. Equity salable coal production expanded from 10 million tonnes in fiscal 2014 to about 15 million tonnes in fiscal 2021, largely due to Maules Creek. The Maules Creek and Narrabri mines should be the key driver of an expansion in equity coal production to approach 19 million tonnes from fiscal 2023. Development of the Vickery deposit could see approximately 8 million tonnes of additional equity production from around 2025.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Schlumberger Will Benefit From the Oil Market’s Recovery From COVID-19

the company has earned solid economic profits for decades. It reached the front of the pack in wireline evaluation in the 1920s, and it hasn’t relinquished its position since. Since then, Schlumberger has used its unrivaled expertise in understanding oil and gas reservoirs to not only drive a continuous stream of profits in its legacy business lines (embedded in the reservoir characterization segment), but also develop other oilfield-services business lines with nearly unwavering success. As one of many examples, the company pioneered directional drilling in the mid-1980s, a technology that today is recognized as an indispensable ingredient in the shale revolution.

Schlumberger is now applying its expertise to a somewhat different strategic focus: lowering the cost per barrel of oil and gas development via the provisioning of performance-linked services. Also, the company is prioritizing its digital capabilities, which will further support its capacity to boost efficiencies for Schlumberger and its customers.

Financial Strength

Despite COVID-19’s disruption of oil markets, Schlumberger remains in excellent financial health, with net debt/EBITDA of about 2 times in 2019. The company has $3 billion in cash and $3.5 billion in credit facility availability, and only about $3.5 billion in debt is coming due through 2023. The company to remain substantially free cash flow positive in the near term even as oil markets are still in the recovery phase.

Bulls Say’s

  • Schlumberger has long spent more on R&D than all its service company peers combined and more than all the oil majors.
  • The company has a multide cade record of innovation and a proven ability to generate shareholder value in even dismal oil market conditions.
  • Asset Performance Solutions is a hidden gem within the company, likely to generate growth with high returns on capital in years to come.

Company Profile 

Schlumberger is the world’s largest supplier of products and services to the oil and gas industry. The company operates its business via multiple groups: reservoir characterization, drilling, production, and Cameron. It is investing more than any other services firm to make its offerings more bundled, which it believes is likely to be one of the key industry trends during the next 10years. Efforts on this front are most visible via the Schlumberger Production Management business, which now accounts for 10% of its revenue.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Strong Thermal Coal Prices Poise New Hope for a Stellar Fiscal 2022

New Hope’s strategy seeks to create value for shareholders by remaining a pure-play coal miner and developing thermal coal assets at a time when major miners–including Rio Tinto and BHP-head for the exits. The strategy is entirely reliant on thermal coal demand remaining robust for decades. The purchase of a further 40% interest in the Bengalla coal mine in fiscal 2019 sees New Hope double down on thermal coal. Total coal production to reach 21.2 million metric tons of run-of-mine, or ROM, thermal coal by fiscal 2023, up from 14.8 million metric tons in fiscal 2018.

While demand for coal has waned in Europe and North America, Asia will remain the relative bright spot for coal demand over the coming decades, according to the International Energy Agency. The IEA sees the possibility that coal demand in absolute tonnage terms could remain steady out to 2040 in Asia, as economic development supports demand. Nonetheless, the potential for greater action on climate change brings the distinct risk that demand could falter earlier.

On the operational front, we’re encouraged by efforts to expedite the realisation of value from New Hope’s assets, given thermal coal’s uncertain future. Bengalla has approval to produce up to 15 million ROM metric tons annually greater than the approximate 12.4 million ROM metric tons mined in fiscal 2020. Capital expenditures required to de-bottleneck the mine and expedite the mining of Bengalla’s reserves are currently being explored. 

Financial Strength

 New Hope’s balance sheet remains well positioned. We view New Hope’s bias toward a conservative balance sheet as appropriate. The volatile nature of coal prices makes the use of significant debt problematic. The balance sheet currently sits in a modest net debt position of AUD 73 million at the end of fiscal 2021. Gearing and leverage remain conservative. We forecast net debt/equity of 2% and net debt/EBITDA of approximately 0.07 times at fiscal 2022 year-end. As such, substantial headroom exists relative to New Hope’s leverage covenant–calibrated at 2.75 times net debt/EBITDA. Our base case factors a long-term coal price of USD 69 per metric ton and the first AUD 200 million of New Acland stage 3 development capital expenditure in fiscal 2022.

Bulls Say 

  • Asia’s growth will see demand for coal in the region remain steady for decades to come. 
  • New Hope’s operating assets enjoy decent positioning on the global thermal coal cost curve. 
  • The ramp-up of production at Bengalla toward 15 million ROM metric tons per year could provide better unit costs.

Company Profile

New Hope Corporation is an Australian pure-play thermal coal miner. Its two operating assets–the 100%-owned New Acland coal mine and its 80% interest in the Bengalla coal mine–produce a cumulative 12 million metric tons of salable thermal coal annually. The vast majority of New Hope’s production is sold into seaborne thermal coal export markets. Reserves at New Acland and Bengalla are sufficient to support multi-decade mine lives. New Hope’s undeveloped coal resources are extensive and include exploration status coal resources in excess of 1 billion metric tons in Queensland’s Surat basin.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Exelon Secures Another Legislative Win; Byron and Dresden to Remain Open

We expect Exelon’s regulated utilities to drive all of our earnings growth through 2025. The segment’s four-year, $27 billion capital investment plan supports 7.5% rate base growth and 6%-8% utility earnings growth. 

Exelon’s generation continues to be a primary concern and the reason we value the company at a discount to its peer regulated utilities. As the largest nuclear power plant owner in the United States, Exelon has suffered as low natural gas prices slashed power prices. The company has shown its political clout, winning price subsidies in Illinois, New York, and New Jersey to keep some of its nuclear fleet running. Illinois recently approved clean energy legislation that will subsidize the Byron and Dresden nuclear facilities.

Illinois lawmakers passed energy legislation that would provide subsidies worth $700 million to Exelon’s Dresden and Byron nuclear plants. Gov. J.B. Pritzker has indicated he plans to sign the legislation, and Exelon has said it is in the process of refuelling both plants.

Financial Strength:

Management has done a good job paring down its nonutility debt. Only about 15% of Exelon’s consolidated debt is directly tied to its generation segment. As long as power markets remain relatively stable and Exelon maintains its investment-grade ratings, we don’t expect the company to have trouble refinancing its near-term maturities. Continued power market weakness could make refinancing more difficult and stress Exelon’s credit metrics.

Balance sheet is expected to remain sound and in line with regulatory requirements, supported by the company’s low revenue cyclicality. Exelon’s operating leverage is somewhat higher than its regulated utility peers’ due to its merchant generation unit.

Exelon’s dividend policy to pay out 70% of regulated earnings is appropriate, given the high quality and relatively stable nature of its regulated assets.

Bulls Say:

  • Exelon’s proposed divestiture of its merchant generation unit would eliminate its earnings sensitivity to cyclical commodity prices that have dragged down returns recently. 
  • The company’s regulated utilities have good growth investment opportunities that should support earnings and dividend growth. 
  • The state subsidies that management has secured for a portion of its nuclear portfolio are a positive for shareholders

Company Profile:

Exelon serves approximately 10 million power and gas customers at its six regulated utilities in Illinois, Pennsylvania, Maryland, New Jersey, Delaware, and Washington, D.C. Exelon owns approximately 31 gigawatts of generation capacity throughout North America.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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AusNet’s Returns Are Falling but Revenue to Rise on Network Expansion

Business Strategy and Outlook

AusNet Services’ security price has risen in recent months in sympathy with Spark Infrastructure, after the latter received a takeover offer. While the two businesses are very similar, AusNet is 51%-owned by Singapore Power and China’s State Grid, which may deter any takeover approach. AusNet trades at a 16% premium to our unchanged AUD 1.70 fair value estimate, offering a distribution yield of 4.8% with modest growth potential.

 As the owner of monopoly infrastructure assets, revenue is highly defensive but heavyhanded regulation rules out excess returns and thus an economic moat. Returns at its three regulated networks are reset every five years to ensure they aren’t overearning, with no meaningful ability to appeal decisions. Slightly better returns can be achieved by cutting costs below allowances set by the regulator. But cost allowances get trued up every five years and outperforming is getting more difficult as privatised networks get more efficient.

Company’s Future Outlook

Timing of the Victorian electricity distribution network’s regulatory reset was fortuitous. The spike in 10-year government bond yields in early 2021 resulted in an allowed return on equity of 5.1% for the distribution network for the five years to mid-2026, up from 4.6% in the draft decision. All else being equal, we estimate this translates to an additional AUD 100 million, or 2.6 cents per security, in earnings each year compared with the draft decision. Bond yields have since weakened but we expect them to trend higher over the long term, pushing allowed returns on equity higher.

For now, an allowed return of 5.1% isn’t too bad. While allowed return on equity has fallen from 7.5% in the prior period, we expect the 30% larger regulated asset base to drive a near 10% increase in average revenue for the next five years. The draft decision for the Victorian electricity transmission network uses a 5.3% allowed return on equity, but that will likely fall to 4.9% in the final decision later this year if government bond yields remain around current levels. That represents a significant fall from 7.1% in the past five years. Revenue, however, should get a boost from lower inflation forecasts and an expanded regulated asset base.

Company Profile 

AusNet Services is a diversified energy infrastructure business, operating Victoria’s primary electricity transmission network, an electricity distribution network in eastern Victoria and a gas distribution network in western Victoria. Singapore Power owns 31% of AusNet, and China’s State Grid owns 20%.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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APA’s Medium-Term Outlook Is Supported by Accretive Expansion Opportunities

Limited regulation, scale, and a superior skills base help it capitalise on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform will weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts.

Infrastructure, primarily gas transmission and distribution, is the core business, generating more than 90% of group EBITDA. The rest comes from part-owned investments and asset management. The investments division owns stakes in smaller gas infrastructure companies, providing solid returns and giving some influence. The asset management division provides management, operating, and maintenance services to most part-owned companies, leveraging APA Group’s skills base to generate good returns outside the regulatory framework.

APA Group’s core strategy during the past decade has been to create an integrated east-coast gas transmission grid connecting multiple gas sources to multiple markets. This is now complete following numerous acquisitions and the firm is progressing a similar strategy in Western Australia, connecting to remote mine sites and towns. Expansion creates economies of scale and synergies from linking pipes together into a network with one manager.

Financial Strength

APA Group is in sound financial health. It carries a lot of debt, but this should be manageable given highly secure revenue. Net debt/EBITDA to fall to 5.5 times in fiscal 2023 as development projects complete and earnings start to flow. The firm’s average interest rate is around 4.8%, down substantially in recent years following the issue of the cheap debt to fund the WGP acquisition and expensive hedges rolling off on other debt. The recent refinancing of medium-term debt should reduce average interest rate to about 4.8% in fiscal 2022. Average debt maturity is long at more than seven years, and 100% of interest rates are fixed or hedged.

Our fair value estimate for APA Group is AUD 9.80 per security. Our valuation implies a forward fiscal 2022 enterprise value/EBITDA multiple of 12.5 times, with a distribution yield of about 5.4%. Expansion projects drive solid EBITDA growth of 4.8% on average for the next five years in our discounted cash flow model, while revenue growth for some existing assets is likely to be soft because of regulatory headwinds, gas market reform and some demand shifts.

Bulls Say’s

  • APA Group owns and operates an excellent portfolio of gas infrastructure assets. Its large footprint ensures it is at least partially exposed to growth anywhere in the country.
  • The east-coast gas grid provides improved reliability, greater flexibility, a wider range of services, and economies of scale over single pipelines.
  • Limited regulation allows stronger returns on investment than regulated peers, particularly from organic expansion. However, gas market reform will reduce its advantage.
  • Strong returns are possible from organic growth.

Company Profile 

APA Group is Australia’s largest gas infrastructure company with an extensive portfolio of transmission pipelines, distribution networks, and storage facilities. It is internally managed and has direct operational control over all assets. It owns minority stakes in a few smaller gas infrastructure companies and manages operations for most of these. The stapled securities comprise a unit in Australian Pipeline Trust and in APT Investment Trust.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Woodside Petroleum operating revenue increases by 31% buoyed by demand for LNG and oil

Investment Thesis:

  • Superior free cash flow breakeven price relative to peers have been generated by quality assets (NWS, Pluto, Australia Oil, Browse, Wheatstone) 
  • Focus on cost reduction and positioning of the business for lower oil price environment
  • Earnings improvement through improving oil and gas prices 
  • WPL well positioned to fulfil increasing LNG demand 
  • Strong balance sheet position
  • Good with free cash flow generation
  • Potential exploration success in Myanmar, Senegal, Gabon. 
  • Change in CEO could either result in some uncertainty around future strategy or it could also be an opportunity to refresh the strategy with a “fresh” set of eyes 

Key Risks:

  • Imbalance in supply and demand in global oil/gas markets
  • Low oil / LNG prices
  • Not meeting cost-out targets (e.g. reducing breakeven oil cash price)
  • Disruptions in production

Key Highlights:

  • WPL reported 31% increase in operating revenue, buoyed by higher realised prices mainly driven by the recovery in demand for LNG and oil
  • Underlying NPAT was up +17% 
  • Board declared an interim dividend of US 30cps (up +15% over pcp), representing a payout ratio of ~80% of underlying NPAT
  • Announcement of merger with BHP’s oil and gas business, which is expected to deliver cost synergies north of US$400m p.a. by leveraging combined capabilities and capital efficiency, creating a higher margin oil portfolio
  • Improvement in balance sheet with gearing declining -110bps over 2H20 to 23.3%, remaining within target range of 15-35% and free cash flow (FCF) was up +18% to $311m.
  • Appointment of Meg O’Neill as the new permanent CEO and managing director
  • Revenue generated by WPL segments are; Pluto contributes 47% of the total revenue, NSW contributes 26%, Australia Oil contributes 14% and Wheatstone contributes 13%.
  • EBITDA generated by WPL segment are; Pluto contributes 49% of the total EBITDA, NSW contributes 24%, Wheatstone contributes 15% and Australia Oil contributes 12%.

Company Description:

Woodside Petroleum Ltd (WPL) explores for and produces natural gas, liquefied natural gas, crude oil, condensate, naptha and liquid petroleum gas. WPL owns producing assets in the North-West Shelf (NWS) project, Pluto LNG and Australian Oil. WPL is currently developing Browse, Sunrise, Wheatstone, Grassy Point and Kitimat LNG. WPL is currently undertaking exploration activities in Myanmar, Senegal, Morocco, Gabon, Ireland, NZ and Peru.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Ampol Ltd. reports 85% rise in EBIT during 1H21

Investment Thesis:

  • Short term challenges being cyclical in nature when coupled with the impacts of the Covid-19 brings muted outlook for the company in terms of the earnings 
  • ALD operates in the market which offers very high market entry barrier restricting the number of players
  • Replication of the infrastructure and supply chain process is difficult
  • Refinery capacity is set to be exceeded by the regional product growth over the duration of next five years, thereby putting the Lytton refinery business in top notch position
  • Acquisitions would further lead the way towards market expansion
  • Refining to be provided less exposure
  • Significant growth is expected to be delivered during the medium to long term duration by revamping retail/convenience model
  • Management of capital in an efficient manner

Key Risks:

  • Lytton refinery facing operational and incident risks
  • Impact of Coronavirus on refinery margins
  • Continuation of drop in refinery margins
  • Refinery and retail facing competitive pressures
  • Currency movements in adverse directions (USD and AUD)
  • Longer term disruption from Electronic Vehicles (EV).
  • Regulatory risk.
  • Class actions by franchisees or employees (e.g. employee underpayments by franchisees). 

Key Highlights:

  • ALD reported 70.8% increase in 1H21 RCOP NPAT to $205m mainly driven by Fuels & Infrastructure business, which delivered an +85% increase in EBIT largely due to the improvement in profitability of the Lytton refinery and the receipt of the Federal Government’s Temporary Refining Production Payment of $40m
  • Strong balance sheet with high amount of liquidity and proforma leverage of 1.6 times
  • Net borrowings were $735m, i.e. up by 69% over 2H20, reflecting the $300m off-market buy-back during the period
  • Shareholder returns continued with the Company completing $300m off-market buy-back
  • Declaration of a fully franked interim dividend of 52 cps, representing a 61% payout ratio of 1H21 RCOP NPAT
  • A non-binding indicative proposal to acquire Z Energy (a Wellington headquartered fuel distribution and retailing company that owns and manages 330 fuel stations and truck shops in NZ) funded through new debt facilities, proceeds from any divestments and an equity issuance in the order of ~A$600m
  • The segment of Fuels & Infrastructure (ex-Lytton) RCOP EBIT declined 7% to $159m primarily due to a reduction in earnings from Trading and Shipping as the elevated imported volumes in 2020 were replaced by Lytton refinery production in 1H21.
  • Total Convenience Retail segment fuel sales volumes were 2.05bl, +3% higher over pcp (+5% on a like-for-like basis), however, earnings from fuel sales declined due to diesel margins lagging movement in crude prices

Company Description:

Ampol Limited (ALD) purchases, refines, distributes and markets petroleum products in Australia. The company’s products include petroleum, motor oil, lubricants, diesel fuel and jet fuel. Caltex also operates convenience stores, fast food stores and service stations throughout Australia. ALD operates one refinery (Lytton, QLD), 25 terminals, 107 depots and about 2,000 service stations and diesel/truck stops.  The Caltex infrastructure network is a key competitive advantage

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Growth in Aurizon’s Bulk Business to Offset Stagnant Coal

Growth in Aurizon bulk business to offset stagnant coal. Coal prices have recovered but downward pressure is likely to remain on haulage rates and volumes due to intense competition. The coal-haulage market is highly concentrated, with few competitors and a few large customers. Commercial contracts, which are typically five to 12 years in length, underpin defensive revenue with customer commitment to take-or-pay (around 70%), pass-through of rail network access fees, and annual consumer price index increases. These contracts have helped insulate the firm from volatility in coal demand and supply factors to date.

 Aurizon’s non-coal bulk-haulage operations are typically low-margin and extremely variable, with customers based in the volatile agricultural, manufacturing and mining sectors. Aurizon’s iron ore customers are typically higher-cost juniors. The long-term outlook remains challenging for these firms, despite recent iron ore strength, as low-cost majors continue to bring on new supply, despite China slowing. Aurizon’s earnings from iron ore haulage could disappear over the medium term.

Aurizon’s Central Queensland Coal Network, or CQCN, provides essential transport infrastructure for the main metallurgical-coal-mining region in Australia. The CQCN is leased from the Queensland government until June 2109, with competitor access and access charges strictly regulated by the Queensland Competition Authority. Despite being highly regulated and needing large capital investment, the CQCN is a monopolistic rail system that provides Aurizon with highly predictable long-term revenue. Typically, regulated tariffs are the main source of Aurizon’s revenue from the CQCN, with the access undertaking set every three to five years. However, until 2027 network tariffs are set under an agreement with customers.

Financial Strength

Aurizon’s financial health is sound. As of June 2021, gearing stood at 45.6%, up from 37% in 2016 and 30% in 2015.Net debt/EBITDA of 2.4 times in fiscal 2021 is reasonable, and should fall modestly in the medium term in the absence of acquisitions or share buybacks. The firm pays out up to 100% of underlying NPAT as dividends. Further share buybacks are also possible, funded by proceeds from asset sales and debt. Cash flows are relatively reliable thanks to long-term take-or-pay coal-haulage contracts and the regulated rail network business. Capital expenditure has been fairly flat since fiscal 2017 at roughly AUD 500 million each year, mainly comprising stay-in-business capital expenditure. Aurizon has completed large-scale rail network extensions and is focused on cost-cutting. Investment in the bulk division is increasing but free cash flows should remain strong.

Bulls Say

  • Restructuring initiatives should substantially decrease operating costs. 
  • Improving efficiency, essential transport infrastructure, and reasonable level of debt should ensure steady earnings, except in the most difficult circumstances. 
  • Aurizon is reducing overhead costs and improving network efficiency to generate economic returns.
  • The bulk division has good growth prospects, though it is dwarfed by coal-exposed divisions.

Company Profile

Aurizon operates rail haulage of coal, iron ore, and freight, and owns a regulated rail network in Queensland. Bulk export coal haulage from mine to port contributes 40% of earnings. The freight and iron ore segment contributes 10% of earnings and undertakes the rail haulage of bulk agricultural, mining, and industrial products. The rail network, composed of 2,670 kilometres of coal rail network under a 99-year lease from the Queensland government, contributes around half of earnings.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.