Aurizon Holdings Ltd (ASX: AZJ) is a rail haulier of coal from mine to port in QLD and NSW. AZJ also owns railway track infrastructure in the Central Queensland Coal Chain.
AZJ also hauls commodities such as iron ore and grain.
According to Macquarie, this industrials company's strategy is to double the size of this business. It aims to do this while minimising revenue from haulage of thermal coal to below 20% of above rail revenue by 2030.
It has experienced a rocky last 12 months, seeing its share price fall 14.13% in that span.
What is the new contract with BHP?
According to a new report from Macquarie, AZJ has confirmed it has signed a 10-15 year contract with BHP. The broker estimates it will add around 1% to earnings.
AZJ has successfully negotiated the broader supply contract for BHP at Olympic Dam and its associated mines. The contact involves rail and truck movements, albeit the latter is ~1/3rd of the revenue and is outsourced to an existing BHP contractor. The contract life is ~11-15 years, which is materially longer than other contracts in the bulk portfolio.
Aurizon will invest about $100 million to support the contract, with $80 million being new spending.
According to the report, some of this gain could be offset by lower prices in another contract (the KML contract).
There's also a risk that the Mt Isa rail line could lose income if the Phosphate Hill site shuts down.
Essentially, Macquarie believes this BHP contract is good news for Aurizon in the long run. But, there are some risks in other parts of its business that might reduce the benefits.
How does this impact Aurizon shares?
Macquarie provided a few caveats despite the contract being overall good news for Aurizon shares.
The broker noted volume and commodity prices directly and indirectly impact the company.
Macquarie placed a 12 month price target of $3.39 on Aurizon shares.
This indicates almost a 10% upside from the current share price of $3.10.
It seems other brokers also see moderate upside.
Bell Potter has a target price of $3.20.
Trading View has a 12 month price target of $3.33 and online brokerage platform Selfwealth has an "undervalued" rating on Aurizon shares with an average target price of $3.33.
