Aurizon’s (ASX: AZJ) first-half fiscal 2026 underlying NPAT increased 16% to AUD 237 million on 4% revenue growth, operating leverage, and non-repetition of one-off costs. Earnings guidance was maintained, but management lifted full-year dividend guidance by $0.03 to $0.22-$0.23 per share.

Why it matters: A solid result showing long-awaited improvement in coal and non-coal haulage, and stronger free cash flows allowing more dividends and share buybacks. Shares were up 7% after the result.

  • We still see headwinds in coal haulage, given weak operating conditions and significant recontracting to come, though recent strength in coal prices, if persistent, could lead to better outcomes. Non-coal earnings recovered sharply this half, and the outlook is improving.
  • The regulated rail track’s strong run is set to continue with a planned 10-year contract with customers starting in 2027, which should keep earnings ticking higher.

The bottom line: We slightly raise our fiscal 2026 earnings forecasts but leave our longer-term forecasts largely unchanged. We maintain our $4.40 per share fair value estimate for no-moat Aurizon. It remains undervalued on a forward P/E of 15 and 5.9% mostly franked yield.

Key stats: Network EBITDA increased 4% to $516 million, driven by higher allowed returns and strong cost control. An ownership review concluded that the sale or demerger of Network would not be in the best interests of shareholders, given the strength it lends to the rest of the business. We agree.

  • Coal EBITDA increased 13% to $289 million on higher volumes, prices, and cost savings. Management flagged a likely weaker second half on a less favorable customer mix and increased maintenance activity.
  • EBITDA in the non-coal bulk haulage segment increased 39% to $117 million on 4% growth in volumes and nonrecurrence of derailment and bad debt costs.

Growth in Aurizon’s bulk business to offset long-term deadwinds to coal

Aurizon’s rail operations hold significant cost advantages over other forms of bulk commodity transportation, though the industry is highly cyclical and competitive. Downward pressure is likely to remain on haulage rates and volumes as overcapacity drives intense competition.

The coal-haulage market is highly concentrated, with few competitors and a few large customers. Aurizon holds major positions in the domestic coal-haulage market. Commercial contracts, which are typically five to 12 years in length, underpin defensive revenue with customer commitment to take-or-pay (around 60%), 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.

The non-coal haulage business currently contributes a tenth of operating income, but it is the main focus for growth to diversify away from coal and maintain support of lenders. This business provides integrated supply chain services, including rail and road transportation, port services and material handling for a range of mining, industrial and agricultural customers across Australia. It also hauls containers long distance by rail.

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.

Bulls say

  • Restructuring initiatives should decrease operating costs.
  • Improving efficiency, essential transport infrastructure, and a 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.

Bears say

  • Over 80% of EBIT is exposed to domestic coal production, a major risk if demand falls or if production is disrupted.
  • High fixed costs and capital expenditure requirements ultimately remain a restriction on profitability and free cash flow.
  • The long-term outlook for coal demand is depressed by ESG concerns.

Aurizon is a member of Morningstar’s income share pick list which Investor subscribers can access here.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.