Research Update: Aurizon Operations Ltd. 'BBB+' Rating Affirmed With Stable Outlook After One Rail Australia Deal

We believe rail freight operator Aurizon Operations Ltd. (AUO) will be able to absorb a debt-funded acquisition of One Rail Australia (ORA) for A$2.43 billion, and the subsequent divestment of ORA's coal business. AUO management remains committed to the current rating level with a reduction in dividends to lower end of policy of 70%-100% of its net profit after tax, and no share buybacks. Consequently, we forecast the ratio of funds from operations (FFO) to debt for AUO to trend at 29%-35% over the next two to three years. The consolidated Aurizon group FFO-to-debt ratio will remain higher than 25% from fiscal 2023 and beyond. Therefore, we affirmed our issuer credit rating on AUO at 'BBB+'. The stable outlook reflects

...- We believe rail freight operator Aurizon Operations Ltd. (AUO) will be able to absorb a debt-funded acquisition of One Rail Australia (ORA) for A$2.43 billion, and the subsequent divestment of ORA's coal business. AUO management remains committed to the current rating level with a reduction in dividends to lower end of policy of 70%-100% of its net profit after tax, and no share buybacks. - Consequently, we forecast the ratio of funds from operations (FFO) to debt for AUO to trend at 29%-35% over the next two to three years. The consolidated Aurizon group FFO-to-debt ratio will remain higher than 25% from fiscal 2023 and beyond. - Therefore, we affirmed our issuer credit rating on AUO at '###+'. - The stable outlook reflects AUO maintaining its dominant position in the above-rail coal freight market and increasing contribution from bulk over the next two to three years and that a proposed hybrid issuance should improve headroom in the financial metrics for the company....

Research Update