The Aurizon Holdings Ltd (ASX: AZJ) share price may be an undervalued opportunity for investors to consider right now.
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What is Aurizon?
Aurizon is not exactly a household name. But it is one of the bigger businesses Australia, with a market capitalisation of more than $6 billion, according to the ASX.
It is Australia's largest rail freight operator, transporting more than 250 million tonnes of Australian commodities. The company says it connects miners, primary producers, and industry with international and domestic markets. It provides customers with integrated freight and logistics solutions across a national rail and road network, traversing Australia.
Aurizon also owns and operates one of the world's largest coal rail networks, linking approximately 50 mines with three major ports in Queensland.
Is the Aurizon share price an opportunity?
Some analysts think that it is. For example, the broker Morgans currently has a buy rating on the business with a price target of $3.73. At the current level, that suggests a high single digit rise of Aurizon shares over the next 12 months.
The broker thought that the market was too pessimistic about the acquisition of One Rail Australia. However, the broker noted the planned reduction in shareholder payouts led to a reduction of the price target.
Other analysts, such as the ones at UBS, currently rate Aurizon as 'neutral' with a price target of $3.50. It also commented on the acquisition, noting it would lead to less reliance on coal earnings, though it will need to invest more capital.
One Rail Australia acquisition
Last month, Aurizon announced it was buying One Rail Australia for $2.35 billion.
One Rail Australia has bulk rail haulage and general freight assets in South Australia and the Northern Territory, the 2,200km Tarcoola to Darwin railway line and a haulage business in NSW and Queensland.
Aurizon said it was going to divest the NSW and Queensland business, East Cost Rail, through a demerger or a trade sale, whichever creates more value for shareholders.
The ASX rail business said that One Rail Australia is a strong, profitable business with an aggregate estimated earnings before interest, tax, depreciation and amortisation (EBITDA) of $220 million in the 2021 calendar year. The bulk business made around $80 million of the EBITDA, whilst East Coast Rail made around $140 million of the EBITDA.
After the acquisition and divestment of East Coast Rail, Aurizon said that the bulk share of haulage revenue would be approximately 40%.
Management said this acquisition is fully aligned with its strategy to grow the bulk freight business into new markets and new geographies, supporting growth of non-coal revenue.
Looking at the above rail bulk volume within the One Rail business, the majority of it is iron ore, but there is also gypsum, grain, manganese and copper.
Reduction of shareholder cash returns
One of the things that brokers noted was the reduction of cash payouts to shareholders, which could impact the Aurizon share price.
Aurizon said the internal rate of return exceeds the implied returns from the share buyback.
It said that its annual dividend policy would remain at 70% to 100% of underlying net profit after tax, though dividends would likely be toward the lower end of the range for one to two years with the final outcome dependent on the divestment option undertaken.
Aurizon said it's committed to maintaining its credit rating.
Whilst Morgans expects Aurizon to pay a dividend of $0.20 per share in FY22, UBS has projected an annual dividend of $0.29 per share in the current financial year. The lower estimated payout represents a partially franked dividend yield of 5.8%.
