Aurizon Holdings Limited (Aurizon, the Group, ASX: AZJ) is a freight rail transport business which was privatised in November 2010. It was formerly named QR National Limited and manages Australia’s largest coal export rail network that employs 6,000 people. Aurizon transports more than 250 million tonnes of Australian commodities each year, connecting miners, primary producers, and industry with international and domestic markets.
Ongoing earnings resilience
The resilience of Aurizon’s earnings can be attributed to the fact that it is the volume of the coal, iron ore, grain and other commodities transported on its rail network rather than the price of such commodities that determines underlying earnings. By focusing more on commodity freight volumes hauled by Aurizon and less on commodity prices, investors can appreciate the defensive and dependable nature of Aurizon’s earnings.
Other factors that underscore the resilience of Aurizon’s earnings are the investment grade credit quality of its customers, the long-dated contracts under which freight is hauled on the network, and the high cash-backed nature of the Group’s earnings.
Growth opportunities in Containerised Freight.
As Australia’s largest rail freight business, Aurizon sees a significant revenue opportunity to provide Containerised Freight services covering all major capital city markets, together with import/export terminals.
Rail freight offers a competitive advantage compared with road transport over longer distances, in that each freight train can carry the equivalent of 150 semi-trailers and generates up to 95 percent less carbon emissions. Trials have commenced with major car importers through Darwin as Aurizon works toward delivering regular volumes of land-bridging freight by rail to southern markets.
Containerised Freight through Darwin provides a material time saving of seven days, enabling faster freight delivery for customers and better inventory management by reducing freight in transit. Other advantages include enhanced predictability using regional ports to avoid congested ports in major city hubs and increased utilisation of vessel fleet given a material reduction in sail-times. The availability of low-cost land-side storage and distribution centres outside of main cities where availability is scarce and expensive is driving increased demand for Aurizon’s Containerised Freight services. Supply chain resilience is equally important as global (and local) shipping disruptions have brought an increased focus on the need for multiple pathways for the movement of freight.
Despite the current soft economic environment, Aurizon is positive on the future for container traffic in Australia. This is based on the underlying long-term strength of the economy and the competitive advantage that rail freight offers as Australia pursues efficient, low-carbon supply chains.
Darwin to Tarcoola Railway
This is a nationally significant infrastructure asset – a north-south supply chain for Australia connecting Australia’s northernmost port at Darwin, with Tarcoola, which is an important railway junction west of the township from where the Ghan line heads north and the Indian Pacific line heads west.
Darwin is on the doorstop of Asia which is the home of Australia’s largest trading partners: buying Australia’s high-quality commodities in resources and agriculture; and delivering to Australia’s shores everything from motor vehicles, telecommunications, electronics, and solar panels through to clothes and footwear. Most of these imports arrive in Australia by container and that quantity has doubled over the past two decades.
Aurizon consider this integrated rail-port supply chain link of strategic significance, representing the opportunity over coming decades to significantly increase export and import volumes through Darwin.
The future
In a broad sense, investors consider the Aurizon business as a reflection of the resource wealth and economic prosperity of Australia given the nation’s exposure to the range of high-quality commodities Australia produces. These include metallurgical and thermal coal, iron ore, bauxite, copper, rare earths, grains, phosphate, fuels, and chemicals.
Investors also focus on Aurizon’s monopoly assets comprising the 700 locomotives, 5,000 kilometres of rail track infrastructure and access to terminals and portside assets that transport these commodities.
Aurizon is well-positioned to maintain its consistent performance in coal haulage and grow its presence in the containerised freight market. The growth of rail freight markets and Aurizon’s national footprint of high-quality assets should ensure shareholder value accretion over the long-term.
