What Happened to the AZJ Share Price?
Aurizon Holdings Ltd [ASX:AZJ] drifted higher today. By 1.50pm, the stock had fallen back from a higher opening price to a marginal 0.42% gain from the previous day. The market was lower on fears of further falls in iron ore prices. This caused the big miners to sink lower, including BHP and RIO. It is clear the oversupply in iron ore is by no means over.
Why Did This Happen to AZJ Shares?
The latest results have made AZJ shareholders very happy. The Australian rail freight operator doubled its half-year profit to $308 million. Underlying earnings grew a respectable 15%. The company was able to achieve this through cost control and rising productivity.
Despite the current tough environment, AZJ saw its freight volumes increase by 1%. Iron ore freight was down by 14%. Aurizon expressed that its transformation program delivered solid results in the 18 months ending in December 2014. The company reaffirmed its coal and iron ore freight tonnage outlook for 2015.
What Now for AZJ?
While the company’s latest results were solid, there is still concern surrounding the stock. Currently, market analysts are undecided on giving the stock an ‘outperform’ or a ‘hold’ rating. There are also a number of calls for ‘buy’ on the company’s stock.
What should investors think? There is no doubt that AZJ has proven its ability to defend its bottom line. The company is fundamentally sound for the long term. However, what makes short term investors think twice about the company is the outlook for freight volume in 2015.
Are we over the worst of the commodity deflation? Iron ore was evidently much lower in volume transported. That would have been the result of both increased supplies from larger miners and cuts from smaller producers.
In terms of iron ore, oversupply will remain a problem in 2015. China’s demand recovery is slow coming, and price is still depressed. There is no clear upside to the iron ore price in 2015, which means we will only see a very gradual rebalancing in the year. The same can be said about coal. There is no clear upside to coal price in 2015.
What will drive AZJ’s profit will continue to be internal efforts to cut costs and improve efficiency. With no clear upside to commodity prices, there is also not much upside to the stock’s valuation.
Emerging Market Analyst, New Frontier Investor