The Aurizon Holdings Ltd (ASX: AZJ) share price has dropped 2.77% at 11:30 am to $3.16 a piece. For the year, the share price is 11.48% lower.
The decline follows Macquarie Group Ltd (ASX: MQG)'s latest investor update on the stock. There hasn't been any announcements to come out of the company today.
Here's what the broker has to say.
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Macquarie downgrades Aurizon shares
In its note to investors this morning, Macquarie downgraded its outlook on Auziron shares to neutral, from outperform. The broker also lowered its target price to $3.31, down from $3.39 previously.
At the time of writing, this represents a potential 4.75% upside for investors over the next 12 months.
"Neutral (prev OP). AZJ has re-rated, but KML repricing and potential loss of Whitehaven constrain earnings rebound. TP $3.31 (prev $3.39)," the broker said.
Concerns around contract movements
Whitehaven is approaching the renewal of both its above rail haulage contracts with Aurizon and Pacific National (PN) from its NSW mines, including Narrabri, Maul Creek, and the start-up of Vickery.
Both PN and Aurizon contracts come to an end in FY27.
"In FY12 Whitehaven contracted ~11.5mt with Pacific National and 16mt of capacity with AZJ, i.e., a total of ~27.5mt. This compared to FY25 saleable tonnage of ~15mt and peak tonnage in 2018 (+20mt). In short, aspirations in FY12 have not transpired in volumes," Macquarie said.
Macquarie thinks Aurizon may consolidate its two contracts into a single contract and reduce its overall size in order to save costs.
"Currently, Whitehaven has ~27mt of contracted rail capacity (last public announcements), yet produces 15mt of saleable coal. We believe a reduction of contracted volume to 20-25mt would provide a simple cost saving with limited change in flexibility," it said.
Aurizon's contract with Whitehaven accounts for 8-10mt of volume and 16mt of contracted volume. A potential loss would reduce AZJ's NSW share to <30%, with future declines anticipated if BHP volumes are not replaced, the investor note explains.
"Earnings impact is harder to estimate. It was a longer haul route, so more capital-intensive than BHP's. We estimate an impact of $20-30m to EBITDA, which is a 4% reduction to NPAT in FY27E. The offset is the contract would release at least ~3 consists, which could be used for other NSW coal opportunities or rolled through to expansion of bulk services in South Australia (standard gauge), with the latter deferring capital," Macquarie said.
Macquarie said it is yet to see a formal confirmation from management.
