Shares in Australia’s biggest rail freight operator, Aurizon Holdings Ltd (ASZ: AZJ), are down by around 5% in Monday’s trade. Aurizon’s weak share price stands in stark contrast to the benchmark S&P/ASX 200 index, which is up around 1% in sympathy with buoyant overseas markets.

Traders have now erased around one third of Aurizon’s market value since the start of December. Could today’s selloff mark the bottom for Aurizon’s share price?

Why did this happen to Aurizon shares?

This morning, Aurizon announced a statutory loss after tax of $108 million for the six months ending 31 December 2015. This result includes $426 million of impairment charges, $186 million of which were newly announced today.

The new impairment charges relate almost entirely to Aurizon’s proposed iron ore project in West Pilbara. The toughening of the market for iron ore has been well documented over the past few months, so it seems investors had likely already priced in today’s writedown.

Investors would have paid closer attention to Aurizon’s outlook statement. This revealed that the company expects an uptick in earnings before interest and tax in the six months to 30 June 2016 — but that this depends on stable freight and iron ore volumes and ‘no material deterioration in trading environment for customers and no major weather impacts’.

Investors may view that expectation as a little heroic, particularly in light of these comments from Aurizon’s CEO Lance Hockridge:

Our underlying business is strong and resilient but we need to respond rapidly in a very challenging business environment for our customersCost reduction and transformation will remain the key drivers of margin growth and shareholder value creation, and were determined to pull every cost and efficiency lever available to us.’

What’s next for Aurizon Holdings Ltd?

After nearly three months of negative price action for Aurizon, its shares have sunk to a three-year low — trading at around 13 times the market’s expectation of next year’s earnings.

It could be a little short-sighted for investors to sell down Aurizon’s share price purely based on its exposure to the iron ore market. The main game for Aurizon is in coal haulage, where it moves high-quality Queensland product which should stay in relatively high demand.

The jewel in Aurizon’s crown is its unique network of rail track assets. Infrastructure investors with deep pockets could be viewing Aurizon’s regulated assets with great interest after the stock’s recent downturn.

Foolish takeaway

The short-term outlook may seem bleak for firms that ship what miners produce. But the most successful investors have the foresight to look through the business cycle.

If you can take that approach, you might look back in a year or two on an investment today in unique, regulated infrastructure assets as a strategic triumph.


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Motley Fool contributor Tim Dohrmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.