Aurizon share price tumbles 7% as profits are derailed

A runaway freight train heading in the wrong direction today.

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Key points

  • Aurizon shares are 7% under water amid deteriorating earnings in the first half 
  • Despite revenue increasing, profits tumbled 34% as reduced volumes and increased costs took their toll
  • Aurizon has cut its forward guidance by 4% based on further weather-caused impediments

The Aurizon Holdings Ltd (ASX: AZJ) share price has landed on the unfavourable side of shareholders today following its first-half results.

In the first hour of trade, shares in the freight rail company are being exchanged at $3.43 — a 7% thumping. If Aurizon shares close around their current level today it will be their worst performance since 20 March 2020.

Aurizon share price suffers amid dismantled earnings

The first half was a mixed bag, but ultimately the detractors prevailed.

Record grain haulage and the completed acquisition of One Rail meant Aurizon benefited from a strong result under its Bulk unit. This portion of the business contributed $521 million in revenue (up 51%) and $100 million in EBITDA (up 33%).

Meanwhile, the Coal unit weighed heavily on Aurizon's EBITDA — contributing only $230 million, down 20% pcp. This subdued performance was attributed to a reduction in volume due to wet weather and lower contract rates.

What else happened in the first half?

During the first half, Aurizon announced the sale of its East Coast Rail business. The Aurizon share price rallied 4% on 16 December last year as shareholders were informed of the sale for $425 million in cash. It was stated that proceeds were initially used to repay debt.

Speaking of debt, Aurizon increased its debt by a total of $70 million during the half to fund its One Rail acquisition. The enlarged debt profile increased the company's interest expense to $104 million.

What did management say?

Aurizon managing director and CEO, Andrew Harding, highlighted the major acquisition of One Rail during the period. The potential to expand into growing areas such as copper, lithium, and rare earths was noted by Harding.

Consistent with our strategy, we delivered strongly on key initiatives to diversify and expand the business in rapidly growing markets and regions. These were substantial steps in our aspiration to double the size of the Bulk business over the decade through organic growth and acquisitions.

Furthermore, the freight company's CEO explained the challenges faced in the first half, stating:

These achievements were accomplished during a challenging period operationally, with prolonged flooding on the East Coast together with a number of significant third-party derailments and incidents that resulted in reduced volumes and revenue.

What's next?

The Aurizon share price is likely feeling the effects of the company's FY23 EBITDA guidance being reduced today.

Due to prolonged adverse weather, management is now forecasting group underlying EBITDA between $1,420 million and $1,470 million in FY23. This reflects a guidance cut of 4% compared to previous expectations.

Lower EBITDA from Coal and Network are the detractors in the forecast. Whereas, Aurizon is anticipating increased revenue and earnings under its Bulk banner.

Aurizon share price snapshot

Despite their blue-chip stature, Aurizon shares have not been the place to be so far in 2023. While the S&P/ASX 200 Index (ASX: XJO) has marched 6.7% higher year-to-date, the freight company's shares have fallen 8.2%.

However, the company has provided its shareholders with an above-industry-average dividend yield. Currently, Aurizon is yielding around 5.8% before factoring in today's interim payment.

Motley Fool contributor Mitchell Lawler 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. 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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