* Sees core earnings rising by up to 9 pct in 2017
* Stops share buyback to build warchest for growth
* Shares fall 6 pct (Adds CEO, analyst comment)
By Sonali Paul
MELBOURNE, Aug 15 (Reuters) - Aurizon Holdings AZJ.AX reported a 16-percent drop in annual underlying profit on a decrease in transported coal and freight and said on Monday it expected operating earnings to grow in 2017 but by less than analysts had been forecasting.
It also flagged it had stopped a share buyback to shore up funds for growth opportunities, which include a bid for Glencore Plc's GLEN.L GRail coal haulage business potentially worth $1 billion.
"Our first impression is that the result, outlook commentary and the stopping of the buyback is likely to disappoint market expectations and as a result we expect the shares to be weak," RBC analyst Paul Johnston said in a note.
Aurizon's shares opened down 6.6 percent following the result.
Profit before one-offs fell to A$510 million ($390 million)for the year to June 2016 from A$604 million a year earlier, which was slightly better than analyst forecasts around A$498 million.
It paid a full-year dividend of 24.6 cents, up 3 percent on a year ago.
Aurizon Chief Executive Lance Hockridge said that while conditions were tough, there were signs that the market had bottomed for its coal customers, with only 10 percent of them now operating at or below breakeven, down from 26 percent six months ago.
"In coal, we're seeing evidence of some stabilisation in the market, both with respect to the actual numbers, the position of our customers and to the sentiment in that space," he told reporters on a conference call.
Aurizon has been scrambling to cut costs as tonnages and revenue have been hit by a slump in the coal sector and said it is on track to achieve savings of A$380 million over the three years to June 2018.
Hockridge said snaring GRail would help Aurizon build on its 25 percent market share in coal transport in New South Wales against Asciano's Pacific National. we're certainly interested, however we're not desperate," he said.
Aurizon needs a new source of growth after writing off its West Pilbara Iron Ore rail and port project, shelved last December due to a market glut. The write-off, booked in February, dragged annual net profit down 88 percent to A$72 million.
The company expects underlying earnings before interest and tax to rise to between A$900 million and A$950 million in the year to June 2017 from A$871 million in 2016, based on coal volumes of 200-212 million tonnes.
That is well below analysts' forecasts around A$970 million for 2017, according to Thomson Reuters I/B/E/S. ($1 = 1.3080 Australian dollars)