4 reasons why you should own Aurizon Holdings Ltd before it leaves the station

The rail network operator Aurizon Holdings Ltd (ASX: AZJ), is in the news because of its combined takeover offer of Aquila Resources Limited (ASX: AQA), with China’s Baosteel. The announcement sent its share price down almost 6% for the week, to $4.87.

The market is pondering the merits of a rail transport company getting directly involved in an iron ore play in WA and its initial reaction wasn’t good.

In the recent past, how has the company performed and how could this takeover offer advance, or hinder it?

1) Past performance:    Since listing in 2010, the former QR National rail company has more than doubled net underlying profit, up to $515.7 million, in FY2013. It hauls a great amount of coal in the eastern states, especially QLD.

Although the coal industry has seen weaker coal sales prices and many jobs have been cut in the past two years, those still in operation are actually shipping more coal to export, to offset those weak prices. Aurizon is a direct beneficiary of that.

2) First half FY2014:    The hefty earnings increases continued, by having interim net underlying profit expand 18%. Apart from a healthy coal haulage volume, it saw an equally pleasing rise in iron ore haulage.

3) Rail network expansion:    Its rail network currently goes to the Mid West region in WA near Geraldton, but not as far as the much richer Pilbara region, near Port Hedland. The company has been in talks with various iron ore miners, between the Mid West and the Pilbara, in hopes that it can extend its rail lines into those lucrative business areas.

One of those miners is Aquila Resources, which owns 50% of the West Pilbara iron ore project. This could put the miner on the map, if it can get the project going.

4) Takeover offer opportunities:    This is where the takeover offer comes in, with Baosteel wanting to play a major part in developing the project. The $1.4 billion bid could be the catalyst for Aurizon, to lock in its role as rail transport operator and develop the rail lines to port.

If it can bring in the rail haulage of the junior miners as well, Aurizon can raise revenues from new rail lines and make the capital investment more economical. It may also have a chance to negotiate for the iron ore haulage of the massive Roy Hill mine project. Once in production, Roy Hill could be the fourth largest iron ore mine in WA. That would be a great feather in Aurizon’s cap to undertake the transport management.

Attractive growth can possibly come from small companies, too. Our top Motley Fool analysts just identified their #1 ASX pick for 2014, a small-cap stock that could be poised for big gains (and offers a fat, fully franked dividend!). Discover all the details now, including the name and code, in this FREE investment report, "The Motley Fool's Top Stock for 2014."

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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