A fair price? Aurizon (ASX:AZJ) share price gains despite 27% dividend dive

It's been an exciting half for the rail freight operator. Here are all the details.

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Key points

  • The Aurizon share price is up 1.1% to $3.68 in early morning trade
  • It follows the release of the company's earnings for the first half of financial year 2022
  • Aurizon announced it has dropped its interim dividend and its coal haulage outlook for the financial year 

The Aurizon Holdings Ltd (ASX: AZJ) share price is wobbling after the company released its results for the first half of financial year 2022 this morning.

At the time of writing, the Aurizon share price is $3.68, 1.1% higher than its previous close.

However, it hit a low of $3.57 earlier this morning, representing a 1.9% fall.

Aurizon share price up despite decreased dividend

Aurizon announced it has dropped its interim dividend to 10.5 cents. This is to support its commitment to maintaining its credit rating as the company works towards a $2.35 billion acquisition of One Rail Australia.

The rail freight operator announced the acquisition in October. The market bid the Aurizon share price down 6% on the back of the news.

The lower dividend represents a 75% payout ratio of after-tax profits for continuing operations.

Also, over the half year just been, the company's bulk business EBITDA increased 1% to $75 million while its coal business saw a 4% jump in EBITDA, reaching $12 million.

The network business EBITDA, however, slumped 7% to $28 million. Though, the dip was mainly due to $49 million of once-off historical Wiggins Island Rail Project fees having been recognised in the prior period.

Discounting that fee, the network business EBITDA increased 6%.

Additionally, discounting that fee, the group's EBITDA for the first half of financial year 2022 would represent a 5% increase on that of the prior comparable period.

What else happened during the half?

The company's bulk business saw the acquisition of the Newcastle Port Services and the start of the 10-year CBH grain contract.

However, those positive events were offset by the end of two contracts and start-up costs associated with the CBH contract.

Aurizon's coal business tonnages were down 3% compared to the first half of last financial year. The company transported 99 million tonnes of the commodity over the six months ended 30 December 2021.

The drop was mainly due to lower demand brought on by flooding in New South Wales, mine-specific impacts, derailments, and protest activities.

Meanwhile, the Aurizon Network business transported 105 million tonnes of coal over the half. That's a 1% increase on the prior comparable period.

Aurizon also implemented a new safety metric. It replaced its Rail Process Safety metric with the Potential Serious Injury and Fatality Frequency Rate.

The company said this will capture the number of incidents that had the potential to, or did, cause serious injury per million hours worked.

What did management say?

Aurizon managing director and CEO Andrew Harding commented on the company's results for the first half:

The business has remained resilient and Aurizon's earnings have remained stable despite challenges in markets that have seen reduced demand due to COVID-19 and customer-related issues.

As an essential service, we have been able to continue to operate the freight supply chains sustainably that are vital for our communities, farmers, manufacturers, and the resources sector.

Aurizon's aim is to double the size of the bulk business by 2030 through organic growth and acquisitions, delivering a significant change in our portfolio mix and continuing to increase non-coal revenues.

What's next?

For those interested in the Aurizon share price, here's what the company expects for the remainder of financial year 2022.

Its EBITDA guidance for the financial year has stayed put at between $1.425 billion and $1.5 billion.

Its group capital expenditure guidance sits between $540 million and $580 million, including around $100 million supporting growth of its bulk business.

The company plans to haul the same amount of coal this financial year as it did last financial year. It expects customer mix and cost management to offset lower contracted rates.

That's despite the company's August prediction that its coal haulage volumes would increase by around 5% in financial year 2022.

It predicts its bulk business revenue and EBITDA will be higher on the back of recent contract wins and port acquisitions.

The company's guidance excludes EBITDA and capital expenditure for its One Rail acquisition. It's also subject to no material disruptions to the commodity supply chain because of weather or COVID-19.

Aurizon is also planning to complete the One Rail acquisition this calendar year, with a tentative target of April. The acquisition will be followed by the divestment of East Coast Rail. Harding commented:

The acquisition supports Aurizon's ambition to increase bulk's share of revenue (excluding network), with an increase of eight percentage points to 41% in the first full year of contribution to Aurizon.

Aurizon share price snapshot

The Aurizon share price is outperforming the market in 2022, recording a 5.44% gain year to date.

That compares to the 3% drop recorded by the S&P/ASX 200 Index (ASX: XJO).

However, the company's stock isn't performing so well in the long term. It has fallen 6.84% over the last 12 months.

Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Aurizon Holdings Limited. 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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