Aurizon Holdings (AZJ) 2015 AGM Report

Company/ASX Code : Aurizon Holdings Limited (AZJ)
Venue :
10am Sofitel Hotel
249 Turbot Street,
Brisbane, Queensland
Monitor : Mr Michael Waterhouse
AGM Details / NoM : Thursday 12th November, 2015
# of Attendees : 350 shareholders plus visitors
# Holdings represented by ASA : 124
Value of Proxies : $3.3 million
# Shares Represented by ASA : 620,000
Market Capitalisation : $11.22 billion

Board borrows buyback share capital for regulated gearing ratio

On opening the AGM, newly appointed Chairman Tim Poole confirmed the Board had approval completion of the 107 million “Buy-Back Share” program with the intended purchase of the remaining 68 million shares during the FY2016.

ASA asked the Chairman why the company was borrowing funds for this purchase. The Chairman indicated that the regulator of the rail network permitted the operator to have a gearing ratio of 55% while Aurizon’s current gearing ratio was around 47%. Borrowing funds for “Buy-Back” shares was an equitable way to achieve the allowed gearing ratio and an efficient use of borrowed funds.

At the resolution for shareholders to elect Mr Poole as a non-executive director, ASA raised concerns over Mr Poole’s three chairmanships and his workload capacity. Mr Poole was appointed to the Board in July 2015 and appointed Chairman following retirement of the inaugural Chairman Mr John Prescott in September. Mr Poole remains non-executive Chairman of Lifestyle Communities Limited, and recently accepted the non-executive Chairmanship of McMillan Shakespeare Limited.

Given Aurizon’s drive to become “best-in-world-class,” ASA sought Mr Poole’s assurance that the Aurizon chairmanship would receive highest priority when competing with other chairperson work demands. Shareholders wanted to avoid the company becoming another “Asciano Limited-like” takeover target. (Mr Poole is a former Chairman of Asciano Limited from 2007 to 2009.)

Aurizon is the largest vertically integrated heavy-haul rail freight operator across Australia with an extensive fleet of locomotives and rolling stock, while also operating the largest regulated below-rail coal network (CQCN) in Australia. The business is capital intensive with Property, Plant and Equipment and Intangibles representing 83% ($9.4 billion) of the company’s $11.34 billion 2015 Total Assets. Long term borrowing is $2.9 billion. Net assets stand at $6.5 billion. The regulated CQCN business provides approximately 50% of continuing operations EBIT.

Mr Tim Poole assured shareholders he has always given 110% effort to his responsibilities and this will continue to be the case.

At the remuneration report shareholder resolution ASA echoed the concerns of the 124 proxies related to Aurizon’s 3 year LTI performance period (with a re-test in the 4th year). ASA regards a capital intensive rail freight and infrastructure business such as Aurizon, is inappropriate for a 3-4 year LTI performance period when it has a longer 5-7 years “business periodicity” from decision making, implementation, through to commissioning and operation for railway projects. ASA requested the Board to re-examine and consider the LTI performance period expanding to 5 years to capture actual performance of new capital works against the performance criteria used to make the investment decision.

While the Chairman indicated a reluctance to move beyond the usual 3 year performance period used by most ASX companies, he was willing to review the period in the future. We await the results.

For 2016 Aurizon’s revenue growth and regulatory returns is expected to be flat with EBIT growth coming from growing volumes of coal and iron ore for Asian exports. The company expects to haul around 210mt–220mt of coal, around 24mt of iron ore and 45mt of freight in FY2016. The Operating Ratio (OR) will be further reduced from the current level of 74.3% of revenues to around 71% with gross annual savings targeted at approximately $350 million by fiscal 2018 stripped from operational costs and through improved efficiencies.

All AGM resolutions were passed by shareholders with 90% or more voting rights in agreement.