Rail transport has two major players, Aurizon Holdings Ltd (ASX: AZJ) and Asciano Ltd (ASX: AIO), both ship commodities and goods across the nation. Goods headed to warehouses and stores may make all or most of their journey by rail, so an expanding economy will have more traffic volumes to and from ports and capital cities.
At the same time, the uptrend in iron ore prices has spurred on a great amount of iron ore production in WA, with the major miners like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) increasing shipping volumes to ports. Coal prices haven't fared so well in comparison, yet miners such as New Hope Corporation Limited (ASX: NHC) and WHITEHAVEN COAL LIMITED (ASX: WHC) in QLD and NSW still have to ship to ports for export revenue.
How do the two rail companies stack up against each other?
Aurizon is the larger of the two – $10.3 billion in market capitalisation versus Asciano at $5.4 billion. That advantage is born from the fact that up until listing in 2010, it was the former QR National, the state-owned QLD railway business. In the state, it not only runs trains, but owns the track underneath, so other train operators have to pay them for using its lines.
Its rail network extends all the way out to the mid-west region near Geraldton, WA. The company entered into a 3-year deal with Brockman Mining Ltd (ASX: BCK) in July 2013, to develop haulage and port solutions for Brockman's Marillana and Ophthalmia projects. It may be talking with other miners to see how it can grow into the Pilbara.
It has a 2.47% dividend and a 21.7 price-earnings. NPAT over the last three years is up from $204 million to $515.7 million, or 36.2% compound annual growth. Analyst forecast consensus is for about 20% annual earnings-per-share growth over the next two years.
Asciano was formed by a spin-off from Toll Holdings Limited (ASX: TOL). It took control of Pacific National rail transport, as well as stevedoring and port operations businesses from Toll and Patrick Corporation. It is second in rail freight transport, according to IBISWorld, with a 33.4% market share. Aurizon has about 40% of the market.
It is number one in stevedoring services, with about 57% market share. Its association with Toll and Qube Holdings Ltd (ASX: QUB), the import/export logistics service provider, means it has a tight hold of the market for shipping goods and freight containers.
Already dominant in the NSW coal shipping market, it signed a new deal with Whitehaven Coal this month to ship coal for 12 years, with transport starting in 2015. It can transport about 11.5 million tonnes annually for the miner.
Extending its business into QLD more, it will be taking over Toll Holdings' North Queensland rail service in a 13-year haulage agreement for intermodal transport.
It has a 2.04% dividend and its price-earnings is 15.8 – less than Aurizon's. Its NPAT has risen since 2010 from $123 million to $350.4 million, or a 41.7% compound annual growth rate. The past 3-year total shareholder return was an average annual 7.16%.
Foolish takeaway
Aside from analyst forecasts giving Aurizon a stronger earnings growth outlook than Asciano, I want to think on a longer time frame than just the next one or two years.
Asciano has better diversification between freight and commodity transport, and with its business connections with Toll Holdings, the leader in road freight transport, it can take advantage of a business cycle upturn.
Aurizon's big draw is that it is a former state-owned business, so when it was privatised, it would have been well capitalised to make sure it didn't fall over. It got the rail lines and associated real estate, which by themselves can generate income and go up in value.
I would lean towards the market dominance and scale of Aurizon. Business development and management skill are two major factors that have to be considered by investors.
