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5 things you need to know before you invest in Aurizon Holdings Ltd

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Aurizon Holdings Ltd (ASX: AZJ) is Australia’s largest rail freight operator which owns a network of 2,670 kilometers of heavy haul rail infrastructure. It was privatised after more than 145 years of ownership by the Queensland government.

Investors familiar with Warren Buffett’s investment in the BNSF railway may be wondering whether Aurizon is a similar long term investment worth buying. Here are 5 things you need to know before you invest in Aurizon:

  1. Reliance on coal. Rail transportation of coal from mines in Queensland and New South Wales to end customers and ports for exporting contributes more than 90% of Aurizon’s earnings. As a result, coal prices are extremely important to Aurizon. For example, when coal prices are low, export volumes are low and rail transportation is consequently low.
  2. Moat / competitive advantage. The coal and freight haulage market is concentrated with few large operators and high barriers to entry. This makes it difficult for new entrants to enter the market and protects Aurizon’s future earnings. Customer contracts also tend to have long a long duration which further protects Aurizon’s revenue.
  3. Operational efficiency. After being government owned for such a long time, there is significant scope for continuous improvement in efficiency at Aurizon. The full extent of possible restructurings and cost cutting initiatives is unknown but it’s safe to say the market will be expecting improvements in operational efficiency.
  4. High capital expenditure. The nature of Aurizon’s business is such that it requires continuous capital expenditure to maintain its assets and infrastructure. This could limit profitability and cash flow.
  5. External factors. Aurizon is reliant on continued economic growth in countries such as China which drives demand for commodities.  Regulatory changes may also impact the industry and hurt Aurizon’s rail network activities.

Foolish takeaway

Whilst it may not have an exciting growth story like XERO FPO NZX (ASX: XRO), Aurizon remains a major player in the Queensland economy. However, your view on the future of coal may affect your view of Aurizon’s long term prospects.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of Xero. 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.

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