Aurizon must convince investors its prospects for earnings growth are sound after the stock suffered a 9 per cent drop on a lower than expected full-year profit result.
The 25 per cent jump in 2023-24 net profit to $406 million and a $150 million share buyback failed to hearten investors, who are worried that Aurizon’s attempt to diversify away from coal haulage is taking too long.
Over the past few years, Aurizon has spent $2.35 billion buying freight rail group One Rail to expand its bulk business; started a new container freight business; and is trying to convince importers to put goods on trains from Darwin to east coast ports rather than carrying them on ships as part of a new “land bridge” strategy.
But Aurizon did not meet its growth target for the bulk operations, and the performance of both its network and coal divisions was below expectations.
Aurizon’s shares slumped 8.8 per cent to close at $3.30, their lowest level in 18 months.
“Aurizon has delivered a weak 2023-24 result,” said RBC Capital Markets analyst Owen Birrell.
Aurizon chief executive Andrew Harding said the containerised freight market was “softer than industry would expect” due to declines in consumer spending caused by inflation and higher borrowing costs.
“If they’re not spending their money on things that go into containers, then there are less containers,” Mr Harding said.
The company’s containerised freight business is mostly composed of a new 11-year contract with Team Global Express, with Aurizon carrying clothing, food and machinery for the logistics group across Australia and along the east coast.
The contract is important to Aurizon because it is part of a plan to help the company diversify away from coal. It is also trying to double earnings from its bulk haulage business over the next decade.
But container freight losses slid with Aurizon forecasting a “broadly neutral” earnings contribution this financial year. Aurizon does not separate out container freight and puts it in an “other” category, where losses deepened 17 per cent to $63 million.
The company has signed up nine new customers, mostly freight forwarders, on spot haulage arrangements, but none are as big as Team Global Express.
Aurizon has spent the past year developing and adding container freight services after signing the Team Global Express contract in February 2023, Mr Harding said. “The real test is the first full year of operations, which is the year that we’re in now.”
And while Mr Harding claimed Aurizon’s “land-bridge” strategy – developing a rail corridor from Darwin Port to South Australia – was showing “green shoots,” it has not announced any new customers.
Aurizon ran a trial with some car importers in June to show the viability of the corridor and had “very real interest” from customers, he said.
Group cash flows in 2023-24 were boosted by an $80 million recovery of regulated income from the Queensland networks business, which provides third-party access to rail tracks, and a $100 million tax refund.
Combined with higher earnings and lower net debt, the benefits more than doubled free cash flow to $661 million, funding the share buyback.
Full-year group earnings before interest, tax, depreciation and amortisation rose 14 per cent to $1.62 billion, within the company’s guidance of between $1.59 billion and $1.68 billion, but below expectations. Aurizon has forecast underlying earnings of between $1.66 billion and $1.74 billion in 2024-25.
The company will pay a final dividend of 7.3¢ a share, representing a payout ratio of 80 per cent of net profit, and bringing annual dividends to 17¢ a share, which was also lower than forecast. Aurizon paid 15¢ a year earlier.
A proposed purchase of South Australia’s Flinders Logistics, which would give Aurizon stevedoring assets at Port Adelaide and at Port Pirie, is expected to cost $25-$35 million if successful. It is being reviewed by the competition watchdog, which has raised concerns it could reduce competition for rail services that handle bulk minerals.
Aurizon’s coal haulage volumes rose 2 per cent to 189 million tonnes, boosting coal earnings by 16 per cent to $528 million.
Bulk haulage volumes slipped by 2 per cent to 66.6 million tonnes due to lower grain volumes and rain disruption, but earnings rose 7 per cent to $229 million.
In Aurizon’s Queensland networks business, volumes rose 1 per cent to 210 million tonnes and earnings increased 14 per cent to $930 million.