Shares in Aurizon Holdings Ltd (ASX: AZJ), the ASX listed rail freight operator were down 3% after the company provided its strategy and operations update to investors.
Aurizon confirmed its FY 2018 EBITDA guidance of $900 million – $960 million but also announced that a number of matters would negatively impact its FY 2019 earnings. The matters include:
- Uncertainty over regulatory approvals from competition authorities for the sale of the Acacia Ridge Terminal and Intermodal Queensland for $220 million. If the transactions do not proceed, the Intermodal Queensland business will be closed with closure costs incurred.
- Cessation of iron ore mine operations with a combined EBIT impact of $50 million in 2019.
- Increase in maintenance and other costs in the Coal division which are likely to offset volume growth and efficiencies from transformation.
Cause for optimism?
Despite the expected FY 2019 setback, it's not all doom and gloom for Aurizon. The company's transformation program has been increasing efficiencies and labour productivity.
Aurizon now expects to reach its three-year (FY 2016 – FY 2018) transformation target of a $380 million benefit. That, along with higher coal volumes and execution of the Bulk execution strategy is expected to result in EBIT growth in FY 2020.
The company has also been increasing its free cash flow which was $340 million in FY 16, $634 million in FY 17 and is expected to be between $650 million and $700 million in FY 2018.
Foolish Takeaway
Overall, I think Aurizon is a solid business with a strong competitive advantage that could secure dividends for shareholders.
Its 5.4% dividend yield is attractive but my only concern is that the majority of its capital expenditure is not going towards growth projects. Given that 100% of its earnings are being paid back to shareholders either as a dividend or via share buybacks, it's not on my buy list for now. I'm currently looking for stocks with better growth prospects.
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