Aurizon boss in spotlight ahead of reporting season

Aurizon share price has underperformed in the past year.

The position of the long-time leader of Australia’s largest freight operator, Aurizon Group, could come under intense scrutiny in August, analysts and market experts warn, with predictions that the group makes a significant impairment to its One Rail operations that it purchased more than four years ago for $2.39bn.

The 2021 purchase has come into focus after the Aurizon share price has underperformed in the past year, falling 13 per cent, leaving some to question how long chief executive Andrew Harding would remain at the helm.

The $5.5bn company also counts activist L1 Capital as its 7.3 per cent shareholder, which has been increasing its holding and may apply boardroom pressure.

Some expect Harding may be close to calling time at the top of the freight operator anyway, because he has been at the helm for almost nine years.

The former Rio Tinto executive joined in December 2016, making his time in leadership at the business longer than is typical for a top ASX-listed company.

Aurizon’s chairman, Tim Poole, has also been leading the boardroom for a decade but has flagged his retirement at the next annual general meeting.

The acquisition of bulk haulage business One Rail was a big bet for Aurizon and based on the hope that companies would opt to transport more bulk commodities from Adelaide by rail rather than bringing in products to other locations via ship.

Four years on, the entity’s earnings account for only a small portion of earnings before interest and tax, with its bulk division generating $20m of EBIT for the six months to December compared to $455m for the overall business.

Some estimate an impairment as high as $500m could be placed on the valuation of the business when Aurizon next delivers its ­results.

Morgan Stanley analysts said in a research note that Aurizon’s coal outlook appeared to be muted and the bulk segment faced counterparty and competitive headwinds.

It added that Aurizon’s high earnings linked to fossil fuels (88 per cent of EBITDA) limited investor appeal.

Aurizon is a vertically integrated heavy haul rail freight operator in Australia. It owns an extensive fleet of trains, 5100km of rail track and port facilities and infrastructure. It was privatised in 2010 after more than 145 years of state government ownership.

Efficiency improvement is an ongoing focus, as is diversifying away from coal.

The medium-term earnings outlook is supported by CPI-linked tariffs, operational efficiency gains and expansion of the bulk business.

Morningstar analysts said in a research note coal exports were recovering from the impacts of prolonged wet weather in recent years, which should gradually absorb overcapacity in coal haulage and support market pricing in the medium term.

The Queensland-based company has weighed a move to split its rail business from its haulage business, but when it comes to buyers, they are not thought to be keen, partly due to the company’s exposure to coal.

Previously, there’s been suggestions that Qube and Aurizon could merge, but most believe that would unlikely be on the cards.

Aurizon told the market it expected earnings before interest, tax, depreciation and amortisation for 2025 to be at the lower end of the $1.66bn to $1.74bn guidance range, subject to no additional ­provisions for impairments or ­receivables.

It has since warned that the impairment for receivables may increase.

The group was known to be one of the creditors to the Whyalla steelworks that entered receivership this year, and at that time, ­Aurizon announced a hefty provision for bad debts.

The company dominates the west coast grain haulage market and carries materials for BlueScope.

After buying One Rail for $2.39bn, Aurizon sold the coal haulage operations within One Rail for $425m to appease competition regulators.