Aurizon Holdings lifts annual profit, but warns of coal earnings slump

Aurizon lifted annual profit and will pursue a $300m share buyback, but expects a hefty fall in 2021 earnings.

Aurizon freight wagons.

Rail group Aurizon lifted annual earnings by 10 per cent and will pursue a $300m share buyback in the 2021 financial year, but warned of a hefty fall in 2021 earnings, with coal volumes set to dip as COVID-19 hits steel demand.

Underlying earnings before interest and tax rose to $909m in the 2020 financial year, up from $829m for the prior 12 months, and within the $880m-$930m range forecast by the company a year ago. Meanwhile underlying annual net profit rose 12 per cent to $531m from $473m.

The outlook is less certain, however, with underlying earnings forecast to be in a range of $830m-$880m for the 2021 financial year.

The annual result was driven by a 17 per cent lift in earnings from its networks business to $469m, which provides access to rail tracks, with earnings in its coal business dipping 1 per cent to $411m.

The COVID-19 pandemic had no material impact on its performance, with its mining clients still producing at high rates, although coal volumes were flat on last year at 214m tonnes, within a 210m-220m range predicted by the company.

Aurizon now expects Australian exports to slide in the coming months.

“We take a view that we will see a soft production export from Australia through the first half and we are currently seeing signs of that for sure,” Aurizon chief executive Andrew Harding said.

Coal volumes are expected in a 210m-220m tonne range, based on the pandemic trimming steel demand among customers in Asia, while earnings from its network business are set to be $50m lower.

Jefferies analysts said: “despite the lower earnings contributions in the 2021 financial year from Network, the rest of the above rail business continues to perform well.”

While Chinese steel demand rose 4 per cent in the 2020 financial year, Aurizon expects softer Indian and Japanese steel demand for Australian coal in the first half of 2021, with India falling by 13 per cent in the last financial year.

“The two most important markets for steel demand for Australian coal exports are China and India. And in China what we’ve seen there is, steel production is 4 per cent ahead of what they did in the 2019 and 2020 financial years. We see that continuing, however what we have seen offsetting that is reductions in India,” Aurizon chief financial officer George Lippiatt said.

“We see India being softer in the first and second quarter and there is a risk that it continues into the second half but we are seeing Indian steel production coming back also,” Mr Lippiatt said.

Mining giant Glencore on Friday said it will temporarily shut its NSW and Queensland coal mines due to tepid demand and a slump in prices, and warned it was taking a hit from China’s ongoing moves to restrict Australian imports.

Aurizon said it was seeing encouraging signs that higher quality coal was being prioritised by China buyers.

“What we have seen is China is pulling back on lignite and tending to keep up metallurgical and thermal coal,” Mr Lippiatt said. “At the moment we are seeing good signs they are prioritising higher quality coal.”

The Brisbane-based Aurizon will also embark on a new $300m buyback in 2021 after completing a $400m buyback last year.

It will pay a final dividend of 13.7c per share, up 10 per cent from a year ago, with the total dividend at 27.4c.

The company’s shares rose 2.2 per cent to $4.65.