Aurizon announced a proposed deal in May with its biggest coal mining haulage customers to extend the length of its controversial UT5 regulatory agreement (which governs access to its rail networks) with the Queensland Competition Authority (QCA) by 10 years to mid-2027. This deal would make a separation of the businesses more attractive to potential new investors, according to Macquarie.
Aurizon is still waiting on final approvals from the QCA for the new UT5 agreement. The QCA has until January 3 to review the proposal but the expected resolution of Aurizon’s long running regulatory dispute has boosted the rail group’s stock, which is trading near historic highs and closed at $5.75 on Friday.
The company’s shares are up 28 per cent over the past 12 months compared with a 4.8 per cent rise in the S&P/ASX 200.
Analysts have also been raising their expectations of stock price performance as interest rates fall amid expectations the company will benefit from a lower cost of equity. UBS this month lifted its 12-month target price on Aurizon to $5.60 from $5.10.
Analysts use bond yields to discount future cash flows and calculate the cost of equity when they value infrastructure stocks.
Aurizon has told investors to expect full year underlying earnings before interest and taxation for operations excluding network business of between $390 million and $430 million. Coal haulage volumes are expected to be between 215 and 225 million tonnes.
The rail group’s vertically-integrated structure – which enables it to maintain and operate rail tracks as well as haul coal and other commodities on trains that run on the tracks – is a legacy of its history as a government-owned entity.
Before the freight rail group floated under the name of QR National in 2010 (it was rebranded Aurizon in 2012), it had been owned by the Queensland government for well over a century.
The decision to publicly list the freight rail operations of Queensland Rail as a vertically integrated company was controversial at the time, with former federal resources minister Martin Ferguson among those raising concerns it would hinder competition.
Rival rail group Pacific National only operates haulage and intermodal businesses and has previously been blocked by the Australian Competition and Consumer Commission from managing rail tracks.
The competition watchdog raised serious concerns in 2015 over Brookfield Infrastructure’s plans to merge Pacific National (then owned by Asciano) with its own rail and ports business.
Brookfield subsequently ended up buying Asciano’s Patrick ports business in a joint venture with Qube while Pacific National was acquired by a group of international investment and pension funds.
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