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Aurizon share price could be set to fall on soft half-year result

The Aurizon Holdings Ltd (ASX: AZJ) share price could be set to plummet today after the company announced a cut to its dividend on the release of its half-yearly report this morning.

The rail freight operator cut its dividend to $0.114 per share, down from $0.14 per share last year, as it maintained its 100% dividend payout ratio despite softer earnings in 1H19. Interestingly, the company appears to have tried to offset this cut by announcing an increase in the franking credit amount of the stock, up to 70% per share from 60% per share in 1H18.

Aurizon’s 1H19 highlights:

1H19 revenue came in at $1.455 billion, slightly missing estimates, down from $1.565 billion in 1H18. The company’s $406 million EBIT was down 16% year-on-year (YoY). Above rail volumes were down 5% YoY, whilst EBIT from the company’s Coal (-5%), Bulk (-29%) and Network (-18%) segments all coming in lower in the half.

Expenses were broadly flat with decreases in energy and fuel on the back of low oil prices largely offset by other areas such as higher depreciation costs. The company posted a 1H19 net profit after tax (NPAT) from continuing operations of $226.9 million, down 19% YoY, while posting a statutory net profit of $223.5 million.

Net cash from operating activities was broadly flat for the group, however, the repayment of $70 million of borrowings saw an 8.70% increase in cash outflow from financing activities to $278.9 million for the half-year. End-of-period group cash was down slightly from $2.0 million to $1.4 million in 1H19.

The company reaffirmed its above rail coal haulage volumes remain within the 215-225 million-tonne guidance range, despite the anticipated impact of the recent Townsville floods, but did note this is reliant on no further weather events in 2H19.

Aurizon’s ongoing saga with the Queensland Competition Authority (QCA) continues, with its conforming undertaking due by February 18. Aurizon continues to face ongoing regulatory challenges such as its dispute with the Queensland Competition Authority (QCA) over the regulator’s 2017 Draft Access Undertaking (UT5) restricting the company’s Maximum Allowable Revenue (MAR) through to 30 June 2021.

Foolish Takeaway

I’d expect to see the Aurizon share price get hammered this morning, arresting a 7.94% share price increase since September 2018. The recent Townsville floods are expected to hit the company’s earnings in 2H19 and when factoring in ongoing regulatory pressures and a dividend cut to boot, I don’t see a heap of upside in Aurizon at the moment.

The increase in the franked portion of the dividend from 60% to 70% is particularly curious given the upcoming Federal election and uncertainty surrounding franking credit policy.

Perhaps the one saving grace is that logistics company Linfox recently completed its acquisition of the company’s intermodal business which had been on the chopping block for many months, and finally received ACCC approval in January 2018.

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Motley Fool contributor Lachlan Hall has no position in any of the 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 Scott Phillips.

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