Aurizon's regulatory uncertainty seems permanent

There is no need to remind investors of the rail freight company Aurizon Holdings that they are experiencing an annus horribilis.

The question they may want to ask themselves is: Will regulatory uncertainty have erased $ 2 billion? Is the value of the business over the last seven months a permanent feature of the business's operating environment?

The answer is probably yes given the intensity of regulation focused on "guaranteed" returns from infrastructure and the willingness of state regulators.

There are not many listed companies that have to face injunctions to stop them from closing a loss-making business, but that's exactly what Aurizon is facing through the Commission Australian competition and consumption. He took an injunction to prevent Aurizon from closing its intermodal business in Queensland.

Even though the answer to the question about regulatory security is negative, Aurizon shareholders must be concerned that the core business of the company is facing a prospect of poor profit. There seems to be a shortage of potential catalysts to re-evaluate the stock.

Andrew Harding, who joined the company as a managing director in 2016, has developed a strategy for business turnaround, including streamlining operations, corporate reorganization and cost reduction of 380 millions of dollars.

Harding's vision includes a call for reform to ensure an "appropriate regulatory model". But the reality is that Aurizon continues to be struck by regulators who enforce existing laws.

First, the draft regulation of the Queensland Competition Authority in December reduced by about $ 1 billion the amount that Aurizon thought he could earn. This is the subject of an appeal to the Queensland Supreme Court

Regulatory Diseases

The ACCC this week has put another twist in the work by accusing Aurizon of reducing competition by the sale of his Queensland. intermodal business at Pacific National. The ACCC also opposes Pacific National's acquiring the Acacia Ridge terminal at Aurizon.

Regulatory problems affecting Aurizon have not prevented value investors from increasing their inventories. Unisuper has recently increased its stake in the company. Other title buyers have been domestic institutions that have replaced foreign owners leaving the company.

Consensus earnings forecasts compiled by S & P Capital IQ suggest that Aurizon's earnings per share will remain stable to negative over the next three years. The upward surprise with its cost reduction initiatives and its timely revision of the vertically integrated model could generate added value.

As the operator of Australia's largest coal exporter network, Aurizon is well positioned to benefit from the expected long life. The growth in demand for coal from Asia is about 2% per year

The cash flow generation of the company is impressive and is expected to be between 500 and 600 million dollars in the coming years according to Macquarie Securities. Aurizon distributed 100 percent of the profits, which means a return of about 5.7 percent. The yield is expected to fall in the coming years to 4.5 percent and this could feed the bearish sentiment.

Aurizon shares have underperformed the S & P / ASX 200 for one, two, three and five years and the chances of this change

For some badysts, the most obvious catalyst for change is a better deal for the company from the next regulatory negotiation. But again the only certainty about Aurizon is the regulatory uncertainty.

Tony Boyd

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