Aurizon books $54m 1H17 net profit despite earlier write-downs
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The freight operator's net profit increase for half bucks downward trend and shareholders receive 13.6 cents a share dividend, even after earlier announcing $321 million of impairments.
Aurizon Holdings (ASX: AZJ) recorded $54 million in statutory net profit after tax (NPAT) for the first half of fiscal 2017 (1H17)--a return to positive territory after its $108-million statutory loss in the same period last year.
Shareholders will receive an interim dividend of 13.6 cents a share, 70 per cent franked, up from 11.3 cents a share a year earlier. Free cash flow increased to $356 million in 1H17, from $63 million in 1H16.
Underlying earnings before interest and tax (EBIT) also increased significantly, up 21 per cent to $488 million in 1H17, from $403 million a year earlier.
However, this comes in the context of $321 million in impairments and one-off expenses, which were announced to the ASX in late January.
The narrow moat-rated business is in the midst of a transformation project, which started in 2015 and stretches to 2018. This generated $64 million in benefits in 1H17 and is on track to deliver on its $380 million three-year target, according to new chief executive officer Andrew Harding.
He attributes much of the performance turnaround to this ongoing program of cost-cutting, financial governance updates, and other restructuring initiatives.
"We are taking a very disciplined approach to managing costs and capital to drive value for our shareholders," Harding said.
"While capital expenditure has reduced and the business is generating strong cash flows, I have a clear view we are able to achieve greater efficiencies, further cost reductions and productivity improvements, while maintaining our commitment to customers and to safety.
In the above-rail business, overall revenues fell 7 per cent to $1.4 billion in 1H17, relative to the same period in 2016. Above-rail coal revenues increased 2 per cent--despite a 1 per cent volume decline--while freight and iron ore were down 8 per cent and 15 per cent, respectively, in line with falling volumes.
Revenues increased 15 per cent to $671 million in Aurizon's below-rail operations, including track management and maintenance in its regulated Central Queensland Coal Network. This was largely due to the recovery of "true-up" revenues from previous years.
Despite the ongoing strength in coal prices, Aurizon's CEO expected this would create only short-term opportunities for the business, due to uncertainty in the sustainability of this price environment.
This is a view shared by Morningstar's senior equity analyst Adrian Atkins, who believes significant investment in capacity expansion by mining companies is "unlikely in the near term, as coal miners remain conservative following the severe downturn".
"Morningstar's commodity outlook is for the coal price to fall materially in the coming years, which if correct would suggest mine expansions are unlikely," Atkins said.
While Aurizon's iron ore haulage increased in the three months to the end of December 2016, up 11 per cent from the prior quarter, he also expects "further increases in volumes are unlikely in the near term".
Atkins anticipates China's shift away from fixed asset investment "will see commodity prices weaken over the longer term, which increases risks to Aurizon given almost all its earnings come from coal and to a lesser extent iron ore miners".
He also points to the difficulty the business has had in diversifying its earnings, with unsuccessful investments in iron ore-related projects and "the underperforming freight business, which remains in a strategic review".
Atkins' outlook for fiscal 2017 remains largely unchanged, with a possibility of further write-downs in 2H as Harding continues to "clear the decks and refocus on the core, competitively-advantaged business".
Harding said Aurizon "remains on track to deliver the full-year earnings and tonnage guidance previously provided to the market," which includes EBIT of between $900-950 million and above-rail tonnages in the range of 255-275 million tonnes.More from Morningstar
Glenn Freeman is Morningstar's senior editor.
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