Aurizon Operations Ltd.

Overview Key strengths Key risks Leading market position in Queensland and good footprint in New South Wales for above-rail coal-haulage. Exposed to volume risk, partially offset by high proportion of take-or-pay revenue in coal segment. Integral part of Aurizon group, which benefits from a stronger below-rail regulated network business. Dependent on coal-related activities, despite increase in bulk segment. Increasing share of bulk freight and greater geographical diversification after acquisition of One Rail Australia's (ORA) bulk segment. Increased leverage over the next one year due to acquisition of ORA's bulk segment. This follows the company's integration of its acquired ORA's bulk business and new contracts secured organically. The acquisition, completed in July 2022, significantly expands the company?s geographical footprint, establishing its

...Aurizon Operations Ltd. (AUO) will benefit from increased contributions from the bulk segment. This follows the company's integration of its acquired ORA's bulk business and new contracts secured organically. The acquisition, completed in July 2022, significantly expands the company's geographical footprint, establishing its presence in South Australia and the Northern Territory. We estimate the bulk and containerized freight segments now contribute about 40% to AUO's revenues (about 30% of EBITDA), up from 25%-30% (15%-20% of EBITDA) in the past two to three years. Earnings should benefit from a ramp-up of the company's 11-year containerized freight deal with Team Global Express Pty Ltd. The ramp-up would offset some volume variability and add some diversity to the business away from coal. We believe AUO's recently announced strategy to expand its bulk and containerized segment is a long-term initiative to improve its operating margins and efficient utilization of assets. The strategy...

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