Aurizon Should Recoup Debbie’s Impact

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This story features AURIZON HOLDINGS LIMITED.
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While acknowledging early days, brokers estimate the impact on Queensland coal rail operator Aurizon from Cyclone Debbie.

-Disruptions are likely to be a net negative for FY17 earnings
-Network likely to recover most of the loss from regulated price increases in FY19
-Most immediate financial impact may be felt in the FY17 dividend

By Eva Brocklehurst

The network of Queensland coal rail operator, Aurizon ((AZJ)), could be closed for an average of three weeks because of the damage from Cyclone Debbie. Peak flooding is still to eventuate in Rockhampton and there are landslips in the Goonyella system.

The company has indicated disruptions are likely to be a net negative for FY17 earnings but believes it is too early to assess whether a change to current guidance is required. More clarity is expected in the coming month. Group operating earnings (EBIT) guidance is $900-950m on above-rail volumes of 255-275mt.

Brokers expect that as the network business is regulated, it should recover much of the loss in this segment via regulated price increases in FY19.

Credit Suisse estimates the financial impact at around $100m of earnings in FY17. Around $80m of this amount is in the network business, which should largely be recovered. Above-rail earnings may be down by only around $23m because a portion of take-or-pay contracts deliver payment despite the company being unable to provide a service.

Nevertheless, the broker suspects the focus on recovery could delay cost reductions and the strategic review of the freight business.

The closure is estimated to have an impact of around -14.6-15.2m tonnes, in Macquarie's calculations, with a further -5mt associated with speed restrictions. The broker had forecast the network to carry 228mt against the regulated forecast of 222mt. Thus, instead of beating the 222mt hurdle, the broker expects volumes of around 206mt

Macquarie expects the FY17 earnings outcome will be below the company's guidance range, at around $875m, and the most immediate impact could be felt in the FY17 dividend. At this stage, the broker expects the dividend to be maintained at the FY16 level of around 24.6 cents.

Regulated Network

Macquarie highlights the defensive nature of the company's earnings, as its regulated network bears little risk associated with weather and production. With two months to go to the end of the financial year, the broker expects the company is most likely entering bond pricing for the subsequent re-setting. That said, while the regulated networks will continue to ensure value stability, Macquarie has factored in a tougher regulatory outcome.

On the other hand, the downside of the business is emphasised in the freight-exposed business by the cyclone. Interruptions to the northern track will require the company to replace trains with truck services in many cases, especially for perishables.

This will add to the cost base of a loss-making business and this cost is not recoverable, being priced into the original contract. As the intermodal asset is being written down, the broker continues to believe divestment is the most likely path.

Based on the guidance for timing of the re-opening, UBS estimates a -5% negative impact to FY17 coal haulage volumes. The broker estimates a -$25m negative impact on above-rail EBIT, which translates to a -3% negative impact to group EBIT.

The lack of evidence regarding major damage to the mines means it is likely the industry will seek to recover some of the lost output by maximising rail loadings after the networks re-open. This suggests to UBS that some of the impact in FY17 will be offset and the benefit should spill into FY18.

Cyclone Debbie

Cyclone Debbie has caused rail and mine closures on each of the systems in the company's central Queensland network as well as the major export port terminals. The company obtains half of its network revenue from the Goonyella and GAPE rail systems. Blackwater is expected to re-open by the end of this week.

The current flood peak is in the Fitzroy Basin, which affects the Blackwater, Moura and freight business between Rockhampton and Brisbane. The Fitzroy River is expected to peak at 9m on Wednesday in Rockhampton. Meanwhile, Goonyella has suffered the most damage so far and may take five weeks to re-open.

FNArena's database shows five Hold ratings and three Sell ratings. The consensus target is $4.80, signalling -6.0% in downside to the last share price. Targets range from $4.20 (Ord Minnett) to $5.10 (Deutsche Bank). The dividend yield on FY17 and FY18 forecasts is 5.1% and 5.3% respectively.
 

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