There are a number of risks that could prevent Aurizon from achieving our forecasts and the shares from reaching our target price, including:
Regulatory risks – Aurizon is exposed to earnings risks from unfavourable regulatory rulings related to its earnings capacity from the Central Queensland Coal Network (CQCN). Regulated returns lower than our expectations could lead to downside to our earnings forecasts.
Exposure to lower coal volumes – Adverse weather, supply chain or miner disruptions could leave Aurizon exposed to lower coal volumes and hence revenues. Furthermore, a slowing of international demand for Australian coal, particularly from Asian countries, could have a material downward impact on hauled volumes.
Increase in competition – Whilst Aurizon operates as a largely monopolistic hauler within its Network business in Queensland. An increase in competitive pressure or competition for market share could put downward pressure on pricing, which would negatively impact revenue and earnings for Aurizon.
Customer concentration – Whilst Aurizon's haulage contracts have an average tenure of ~10 years, its top-5 customers contribute ~80% of total tonnage hauled.
Industrial relations risk – Aurizon has a heavily unionised workforce and operates in an industry with a history for industrial relations tensions between employees and employer.
Upside risk to our forecasts and target price may arise from:
New contract wins – Aurizon may win additional contracts for haulage not currently factored into our forecasts which could provide upside for revenues and earnings.
Broadened transformation program – Aurizon has successfully delivered on its objectives historically to lower operating costs and improve efficiency.
Expansion of rail network – Aurizon may invest additional capital to expand its rail network beyond existing markets, increasing its potential pool of customers or product offering.
All of the above risk factors could cause the shares to deviate from our target price.
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