Today Aurizon Holdings Ltd (ASX: AZJ) released its FY19 half-year results to the market, with its revenue down 7% and net profit after tax (NPAT) down 19% from $282 million to $227 million.
As a result, its dividend was cut from 14cps to 11.4cps. Its dividend was down 19%, in-line with its profit, as it paid out 100% of its profit. To try to compensate for the reduction in dividend, it seems Aurizon’s franking credit rate was boosted by 10%, up from 60% to 70%.
Aurizon is Australia’s largest freight rail operator that was previously owned by the Queensland Government. It was sold by the Queensland Government and floated on the ASX in 2010.
When A Monopoly Isn’t A Monopoly…
On paper, Aurizon is the ideal business to own as it has a monopoly on its coal rail infrastructure in Queensland. However, Aurizon must allow third parties to access its network at prices that are regulated by the Queensland Competition Authority (QCA).
Last December the QCA handed down its final decision on UT5, relating to Aurizon’s pricing for network access. The decision has been felt by Aurizon with $30 million in revenue refunds being recognised in the first half, with another $30 million to come in the second half.
Aside from regulatory pressures, revenue was also down due to the closure of the Cliffs iron ore business in June 2018, along with extreme weather events and industrial action that reduced the volume of coal it was able to transport.
Is It Time To Sell?
The QCA has extended the deadline for Aurizon to lodge a conforming access undertaking on UT5 until 18 February 2019. In the interim, it looks like Aurizon is trying to negotiate with all parties involved for a better outcome.
It is difficult to predict how this will play out with any confidence, but it seems a given that intense regulatory pressure will exist on Aurizon for the foreseeable future. Combined with an unattractive valuation, I have no desire to hold this stock in my portfolio.