TransContainer — Q1 growth trend exceeds our expectations again

TransContainer — Q1 growth trend exceeds our expectations again

Following TransContainer’s strong Q1 results, with adjusted revenues growing by more than 30% y-o-y, we have further increased our forecasts for FY19–20 (revenue up 6–9%). The growth in Q1 was boosted by increased sales to customers located outside Russia. We have increased our valuation to RUB7,100/share on the back of higher forecasts.

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Written by

TransContainer

Q1 growth trend exceeds our expectations again

Q1 results update

General industrials

31 May 2019

Price

RUB6,545

Market cap

RUB90,943m

Net debt (RUBbn) at 31 March 2019

1.57

Shares in issue

13.9m

Free float

0.66%

Code

TRCN

Primary exchange

MICEX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

0.8

31.7

34.3

Rel (local)

(3.0)

23.1

16.0

52-week high/low

RUB6,890

RUB4,300

Business description

TransContainer owns and operates rail freight assets across Russia. Its assets comprise rail flatcars, handling terminals and trucks, through which it provides integrated end-to-end freight forwarding services to its customers.

Next events

H1 results

August 2019

Analyst

Dario Carradori

+44 (0)20 3077 5700

TransContainer is a research client of Edison Investment Research Limited

Following TransContainer’s strong Q1 results, with adjusted revenues growing by more than 30% y-o-y, we have further increased our forecasts for FY19–20 (revenue up 6–9%). The growth in Q1 was boosted by increased sales to customers located outside Russia. We have increased our valuation to RUB7,100/share on the back of higher forecasts.

Year end

Adj. revenue (RUBm)

EBITDA*
(RUBm)

EPS**
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/17

27,782

10,252

448.2

293.0

14.6

4.5

12/18

31,288

13,342

560.9

480.4

11.7

7.3

12/19e

36,480

17,717

751.8

375.9

8.7

5.7

12/20e

41,090

20,745

868.8

434.4

7.5

6.6

Note: *Company definition. **EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong growth in Q1; forecasts increased

TransContainer continued to grow strongly in Q119, with 20% y-o-y revenue growth (implying more than 30% y-o-y adjusted revenue growth) and net income more than doubling to RUB2.6bn. The revenue growth rate in Q1 is above the trend we forecast previously for FY19 (+13% y-o-y or +10% for adjusted revenues). Integrated Freight Forwarding and Logistics Services revenues continue to be the key growth driver for TransContainer (up 18.5% y-o-y in Q1). On a geographical basis, Russian revenues continued to post healthy growth (+11% y-o-y), but sales to customers located in China and Korea demonstrated particularly strong growth (up 213% and 61% y-o-y respectively). We have raised our FY19–20 forecasts, with a 6–9% increase in revenues and a 14–17% increase in net income on the back of the Q1 results. Our forecasts assume a moderation of growth going forward as, following the more than 30% y-o-y increase in adjusted revenue in Q1, we now assume 12.5% y-o-y growth in Q2–Q419.

Containerisation supports growth trend

Although we see economic growth as a key driver for TransContainer, we also believe that containerisation is a structural trend for the Russian market, and should support company’s revenue and profit growth. Currently, only 7.2% of Russia’s potentially containerisable rail cargo is transported in containers and, although this figure rose from 2.2% in 2001, it is still much lower than in the US (18%), India (16%) and Europe (14%). The structural growth from containerisation might have been evident in Q119 when Russian GDP disappointed with 0.5% y-o-y growth, but Russian revenues for TransContainer grew 11% y-o-y.

Valuation: Increased to RUB7,100/share

Although the stock has re-rated over the last few months following a series of positive results announcements, TransContainer’s valuation multiples do not appear demanding and it is trading at a large discount to peers in both emerging markets and developed markets (albeit more in line with European peers). Our DCF-based valuation has increased to RUB7,100/share (from RUB6,100/share) on the back of the higher forecasts. Our valuation implies 6.0x FY19e EV/EBITDA and 9.4x FY19e P/E.

Growth trend exceeds our expectations again

Following strong Q1 results, with adjusted revenues growing by more than 30%, we have further increased our forecasts for FY19–20 (adjusted revenue up 6–9% and net income 14–17%). The growth trend was better than our expectations, even though we have recently increased our forecasts twice, after the Q318 and FY18 results. The growth in Q1 was boosted by increased sales to customers located outside Russia. If confirmed, this trend should support TransContainer’s growth in a time of uncertainty about the country's economic outlook. We have increased our valuation to RUB7,100/share on the back of higher forecasts.

Q1 growth rate stronger than our forecast FY19 trend

TransContainer continued to grow strongly in Q1, with 20% y-o-y revenue growth (implying more than 30% y-o-y adjusted revenue growth) and net income more than doubling to RUB2.6bn, thanks to expanding profit margins. The revenue growth rate in Q1 is above the trend we forecast previously for FY19 (+13% y-o-y, or +10% for adjusted revenues). Integrated Freight Forwarding and Logistics Services revenues continue to be the key growth driver for TransContainer (up 18.5% y-o-y in Q1).

On a geographical basis, Russian revenues continued to post healthy growth (+11% y-o-y), but sales to customers located in China and Korea demonstrated particularly strong growth (up 213% and 61% y-o-y respectively). Overall, as set out in Exhibit 1, sales to customers outside Russia made up more than 50% of incremental revenues in Q119.

Exhibit 1: Y-o-y incremental revenues in Q1 – breakdown by customer location

Source: Company data, Edison Investment Research

In line with expectations, capex picked up significantly with RUB3.4bn investments, which puts the company on track to achieve its RUB13.3bn forecast for FY19 capex (broadly double the level of FY18). Management has previously stated that capex will increase over the next few years, mainly invested in new flatcars, supporting an improved trading outlook (spending on flatcars stopped during the last recession).

Structural growth from containerisation, economic outlook more uncertain

TransContainer expanded significantly in Q1, helped to a large extent by sales to customers located outside Russia. Russian economic growth in Q1 disappointed – according to preliminary Rosstat figures, GDP grew by only 0.5% y-o-y in Q1. Industrial production data was mixed, with very strong growth in February (+4.1% y-o-y, according to World Bank data) followed by a weaker March (+1.2%). The OECD recently cut its GDP forecast for Russia in 2019 to 1.4% (from 1.5%), but increased its 2020 forecast to 2.1% (from 1.8%). Other economic forecasts are more pessimistic, with Russia’s Ministry of Economic Development recently cutting 2019 growth to only +0.8%. Most forecasts expect a rebound in economic growth next year, thanks to increased government spending as Russia targets an extra RUB25.7tn (c US$390bn) by 2024 to boost infrastructure, healthcare and education. However, there are significant uncertainties around the timing of the increased government spending and, in our view, risks to economic forecasts are skewed to the downside after the weak Q1. In this respect, the ability to grow internationally through increased sales to other Asian customers (as in Q1) increases the resilience of TransContainer’s business model and reduces risks for the company.

Although we see economic growth as a key driver for TransContainer, we also believe that containerisation is a structural trend for the Russian market, and should support revenue and profit growth for the company. Currently, only 7.2% of Russia’s potentially containerisable rail cargo is transported in containers and, although this figure rose from 2.2% in 2001, it is still much lower than in the US (18%), India (16%) and Europe (14%).

Forecasts increased; growth trend confirmed

We have raised our forecasts following the strong Q1 results, with a 6–9% increase in revenues for FY19–20 and a 14–17% increase in net income (also reflecting lower financial expenses). Our forecasts assume a moderation of growth in the coming quarters as, following the more than 30% increase in adjusted revenue in Q1, we assume 12.5% y-o-y growth in the remaining quarters of FY19 to reflect potential risks for the Russian economy.

Exhibit 2: Forecast changes for TransContainer

RUBm

2019e

2020e

Adj. revenue

New

36,480

41,090

Old

34,352

37,833

% change

6%

9%

EBIT

New

14,304

16,901

Old

12,925

14,526

% change

11%

16%

Net income

New

10,445

12,072

Old

9,177

10,314

% change

14%

17%

Net debt

New

8,256

17,064

Old

7,002

15,686

% change

18%

9%

Source: Edison Investment Research.

Overall, we now forecast an adjusted revenue CAGR (FY18–20) of 15% (which compares to an FY16–18 CAGR of 19%), reflecting continued volume growth translated into higher revenues for Integrated Freight Forwarding and Logistics Services. Higher revenues combined with a forecast small operating profit margin expansion are expected to drive a 21% operating profit CAGR, on our estimates (vs >70% in FY16-FY18). At the bottom line, this growth is partly offset by an increase in financial expenses (we expect a material increase in net debt, reflecting significant new investments). The company’s leverage/gearing levels are currently extremely low, with only 0.1x net debt/EBITDA at the end of Q119. The utilisation of balance sheet headroom could provide additional growth opportunities (not included into our forecasts).

Valuation increased to RUB7,100/share

Our valuation has increased to RUB7,100/share (from RUB6,100/share) on the back of higher forecasts following strong Q1 results. Our valuation methodology (DCF) and assumptions are unchanged, with WACC of 10.4% and a terminal growth rate of 1% (we obtain an EV of RUB106.5bn and an equity value of RUB98.3bn). As a sensitivity, a WACC that is higher/lower by two percentage points reduces/increases the valuation by RUB1,600/2,300 per share. Our valuation implies 6.0x FY19e EV/EBITDA and 9.4x FY19e P/E.

As shown in Exhibit 3, following the recent re-rating, TransContainer trades more in line with its European peers, but still at a large discount to both emerging markets and other developed markets. We believe at least part of the discount to international peers reflects the stock’s limited liquidity, as well as higher perceived country risk. In this respect, we note that the sale by Russian Railways of a 50% stake in TransContainer to a Russian investor at an upcoming auction (in June or July, according to WorldCargo News, 23 April 2019) may result in an increased free float for the stock, which we would view positively and may lead to a further re-rating of the stock.

The key downside/upside risks for the stock are a slowdown/pick-up in economic activity in Russia and, globally, higher/lower margins.

Exhibit 3: Valuation table for TransContainer and global peers

Company

Country

Price
(US$)

Market
cap (US$)

EV/EBITDA (x)

P/E (x)

Dividend yield (%)

2018

2019e

2020e

2018

2019e

2020e

2018

2019e

2020e

European Transport

Globaltrans Investment

Russia

8.9

1,592

3.64

3.65

3.64

5.64

5.49

5.89

15.89

16.53

18.97

PKP Cargo

Poland

11.0

497

3.19

3.14

3.25

5.95

5.93

7.23

4.53

5.57

5.31

VTG

Germany

59.6

2,021

9.84

9.52

7.65

19.22

15.72

11.45

2.00

2.18

2.88

Average

5.56

5.44

4.85

10.27

9.04

8.19

7.47

8.09

9.05

Emerging Market Transport

China Railway Tielong Container Logistics

China

1.0

1,332

9.65

8.90

6.79

16.12

14.20

11.69

1.43

1.48

1.95

Daqin Railway Co

China

1.2

17,992

4.07

3.68

3.61

8.34

8.02

8.21

6.14

6.22

5.76

Guangshen Railway Co

China

0.5

3,100

5.87

5.26

5.46

16.66

17.26

17.88

2.99

3.20

2.87

Average

6.53

5.94

5.28

13.71

13.16

12.59

3.52

3.63

3.52

Developed Market Transport

Canadian Pacific Railway

Canada

224.5

31,426

14.73

13.27

12.17

20.64

18.34

16.21

0.84

0.96

1.06

Kansas City Southern

US

120.6

12,132

11.44

10.38

9.47

20.20

17.69

15.58

1.19

1.24

1.33

Union Pacific Corp

US

169.8

120,198

13.19

12.66

11.83

21.47

18.68

16.42

1.80

2.13

2.34

Norfolk Southern Corp

US

197.7

52,574

12.51

11.65

10.79

20.79

18.08

16.00

1.54

1.73

1.88

Canadian National Railway Co

Canada

91.2

65,942

14.98

13.28

12.28

22.00

19.69

17.61

1.50

1.75

1.85

Genesee & Wyoming

US

94.7

5,393

11.47

10.45

9.31

24.60

21.83

19.07

0.00

0.00

0.00

CSX Corp

US

74.5

60,299

12.12

11.44

10.94

19.36

17.02

15.49

1.18

1.32

1.46

Aurizon Holdings

Australia

3.6

7,108

8.86

10.23

9.55

18.27

22.80

20.42

5.51

4.35

4.91

Average

12.41

11.67

20.91

19.27

17.10

1.70

1.68

1.85

Global average

9.68

9.11

17.09

15.77

14.22

3.32

3.47

3.75

TransContainer

Russia

104.8

1,463

7.21

5.43

4.64

9.93

9.04

7.82

7.07

5.53

6.39

Source: Refinitiv, Edison Investment Research. Note: Prices as of 29 May 2019.

Exhibit 4: Financial summary

RUBm

2017

2018

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Adjusted revenues

 

 

27,782

31,288

36,480

41,090

EBITDA

10,252

13,342

17,717

20,745

EBIT

 

 

10,163

13,342

17,717

20,745

Operating Profit (before amort. and except.)

 

 

7,495

10,415

14,304

16,901

Intangible Amortisation

0

0

0

0

Exceptionals

306

1,715

0

0

Other

704

268

201

213

Operating Profit (post exceptionals)

8,505

12,398

14,505

17,114

Net Interest

(333)

(420)

(1,283)

(1,834)

Profit Before Tax (norm)

 

 

8,147

10,263

13,222

15,281

Profit Before Tax (FRS 3)

 

 

8,213

11,978

13,222

15,281

Tax

(1,638)

(2,469)

(2,777)

(3,209)

Profit After Tax (norm)

6,228

7,794

10,445

12,072

Profit After Tax (FRS 3)

6,575

9,509

10,445

12,072

Average Number of Shares Outstanding (m)

13.9

13.9

13.9

13.9

EPS - normalised (RUB)

 

 

448.2

560.9

751.8

868.8

EPS - normalised and fully diluted (RUB)

 

 

448.2

560.9

751.8

868.8

EPS - (IFRS) (RUB)

 

 

473.2

684.4

751.8

868.8

Dividend per share (RUB)

293.0

480.4

375.9

434.4

EBITDA Margin (%) (company definition)

36.9

42.6

48.6

50.5

Operating Margin (before GW and except.) (%)

27.0

33.3

39.2

41.1

BALANCE SHEET

Fixed Assets

 

 

45,983

52,139

63,318

80,019

Intangible Assets

384

269

269

269

Tangible Assets

42,196

48,500

59,679

76,380

Investments

3,403

3,370

3,370

3,370

Current Assets

 

 

9,756

15,973

17,043

17,992

Stocks

287

222

259

292

Debtors

1,323

1,744

2,033

2,290

Cash

4,171

9,527

9,527

9,527

Other

3,975

4,480

5,223

5,883

Current Liabilities

 

 

(7,493)

(8,246)

(8,408)

(8,551)

Creditors

(6,068)

(7,920)

(8,082)

(8,225)

Short term borrowings

(457)

(931)

(931)

(931)

Long Term Liabilities

 

 

(7,879)

(13,805)

(20,282)

(29,090)

Long term borrowings

(4,987)

(10,980)

(17,457)

(26,265)

Other long-term liabilities

(2,892)

(2,825)

(2,825)

(2,825)

Net Assets

 

 

40,367

46,061

51,671

60,370

CASH FLOW

Operating Cash Flow

 

 

10,670

14,267

18,570

21,707

Net Interest

(440)

(268)

(1,283)

(1,834)

Tax

(1,483)

(2,144)

(2,777)

(3,209)

Capex

(6,974)

(6,166)

(14,592)

(20,545)

Acquisitions/disposals

33

(1,868)

0

0

Financing

92

372

279

296

Dividends

(650)

(4,072)

(6,675)

(5,223)

Net Cash Flow

1,248

121

(6,477)

(8,808)

Opening net debt/(cash)

 

 

3,534

2,241

1,779

8,256

HP finance leases initiated

0

0

0

0

Other

45

341

0

0

Closing net debt/(cash)

 

 

2,241

1,779

8,256

17,064

Source: Company data, Edison Investment Research


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This report has been commissioned by TransContainer and prepared and issued by Edison, in consideration of a fee payable by TransContainer. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by TransContainer and prepared and issued by Edison, in consideration of a fee payable by TransContainer. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Financials

FCR Immobilien — Sustained high transaction activity

FCR continues to grow its property portfolio which, at 29 May 2019, represents lettable floor space of c 261,500 sqm compared to 175,000 at end-2017. To facilitate this growth, the company recently launched a new €30m bond issue and a share capital increase. FCR deploys its targeted higher leverage at property level, with the bank liabilities to book value of properties ratio at c 67% at end-2018. Meanwhile, it also managed to achieve a solid aggregate return of 32.3% on nine property disposals completed in FY18 (with additional profitable transactions in 2019 ytd), taking advantage of continuing strong underlying investment demand in the commercial real estate (CRE) market.

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