Is Aurizon Holdings Ltd’s profit crash a sell signal?

Aurizon Holdings Ltd (ASX: AZJ) has on Monday morning released its full year profit results which include an eye-catching 88% crash in statutory profit from $604 million to just $72 million.

The bottom line number includes the previously announced asset impairments relating to Aurizon’s investment in Aquila, rolling stock and strategic projects.

As non-cash items that have already been flagged, the market should already have factored this into the current share price. As such, the underlying results are much more important.

Here’s what you need to know

  • Revenue declined 9% to $3.46 billion
  • Underlying earnings before interest and tax (EBIT) fell 10% to $871 million
  • Underlying net profit after tax dropped 16% to $510 million
  • The final dividend was reduced by 4% to 13.3 cents per share (cps), however the full year dividend was up 3% at 24.6 cps

Explaining the causes of the decline in underlying earnings, management of Australia’s largest rail-freight operator singled out a reduction in freight revenue due to a reduction in volumes as a key contributing factor.

Pleasingly for shareholders however, Managing Director Mr Lance Hockridge noted that there had been a steadying in coal volumes in the second half.

Another key positive was the group’s announcement that it is confident of achieving an additional $250 million in cost reductions and productivity improvements. If this target is achieved it will equate to a massive $630 million reduction in the group’s cost base over a five-year period!

Foolish takeaway

Aurizon has been significantly affected by the downturn in the resource sector which has in turn put pressure on its business model. The company has responded quickly to the change in operating environment with an enormous efficiency drive.

Like its peers Qube Holdings Ltd (ASX: QUB) and Asciano Ltd (ASX: AIO), Aurizon owns numerous strategic assets which over the long term should earn a reasonable return for shareholders.

With Aurizon’s management providing guidance for the current financial year of an increase in underlying EBIT to between $900 million and $950 million (excludes a minimum $100 million in restructuring costs), today’s results certainly don’t appear (to me) to be a “sell” signal.

Why These 3 Blue Chip Shares Are Set to climb in 2016

ALL ABOARD! Discover The Motley Fool's Top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required!

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.