Why Aurizon (AZJ) fell 9.9%

AZJ became a three point sell for us today. Why?

Aur­i­zon report­ed a 24% jump in prof­it this morn­ing and the stock fell 9.9%, $4.16 down to $3.75. The prob­lem was­n’t last year. It was what they said about next year.

They guid­ed next year’s earn­ings to $1,725m to $1,775m. The mid­point of that is 1.5% above what they just deliv­ered. Ana­lysts had been expect­ing about 4%. The bot­tom of the range is no growth at all.

Then the coal.

Aur­i­zon’s coal cus­tomers com­mit to a set num­ber of tonnes each year and pay for them whether the coal actu­al­ly moves or not. It’s the clos­est thing the busi­ness has to guar­an­teed income. Next year that num­ber falls by 20 mil­lion tonnes, from 231 mil­lion down to 211 mil­lion.

Half of that is a Hunter Val­ley con­tract they lost months ago, which the mar­ket already knew about. The oth­er half is cus­tomers sign­ing up for less.

And the coal they do haul is going to earn less per tonne. Aur­i­zon spent the past year re-sign­ing more than 60 mil­lion tonnes of con­tracts, includ­ing the big ones with BMA and White­haven, in what they call “a com­pet­i­tive envi­ron­ment.” They kept the cus­tomers. They did it by cut­ting the price.

It was already hap­pen­ing last year. Their con­tracts are tied to infla­tion, so prices rose, which was worth an extra $36m. But the work shift­ed towards low­er pay­ing cus­tomers, which cost them $33m. The two just about can­celled out.

The BMA re-sign­ing is gen­uine­ly good news. Up to 37 mil­lion tonnes a year for twelve years, rough­ly a quar­ter of their Queens­land coal. It does­n’t start until July 2028.

Then the div­i­dend. They lift­ed it 46%, to 23c, and hand­ed over 90% of prof­it to do it. In the same year, the cash actu­al­ly left over for share­hold­ers fell 4%, from $412m to $397m. Debt edged up. And they spent $250m buy­ing back their own shares at an aver­age price of $3.72, which is three cents below where the stock closed today.

Next year’s div­i­dend is guid­ed at 23c to 24c, so flat. The mon­ey they have to spend just main­tain­ing the track and trains they already own goes up about 8%. And there’s no buy­back planned at all.