TransContainer — Update 8 September 2016

TransContainer — Update 8 September 2016

TransContainer

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TransContainer

Q2 volume recovery boosts earnings story

H116 results

General industrials

8 September 2016

Price

RUB3,695

Market cap

RUB51bn

RUB65.1/US$

Net debt (RUBm) as at 31 December 2015

3,527

Shares in issue

13.7m

Free float

50%

Code

TRCN

Primary exchange

MCIX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

12.8

25.5

71.1

Rel (local)

6.8

19.2

41.7

52-week high/low

RUB3,695

RUB1,870

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 event

EGM

9 September 2016

Analyst

Jamie Aitkenhead

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

industrials@edisongroup.com

TransContainer is a research client of Edison Investment Research Limited

TransContainer’s (TRC) H116 results showed the company is benefiting from improving market conditions bolstered by active cost management. Russian rail-freight volumes increased by 6.1% in H116; Q2 volumes in particular accelerated significantly. This rebound, in contrast to a sluggish overall economic performance in Russia, was driven by increasing levels of ‘containerisation’ in the country and gives us confidence in our FY16 earnings forecasts for TRC. The 360bp improvement in EBITDA margins versus H115 is a further reason to be positive as evidence mounts that TRC is moving well beyond its FY15 earnings trough.

Year
end

Revenue (RUBm)

PBT*
(RUBm)

EPS*
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/14

20,538

3,751

286

71

12.9

1.9

12/15

20,311

3,530

139

52

26.6

1.4

12/16e

21,849

4,582

264

66

14.0

1.8

12/17e

23,664

5,669

327

82

11.3

2.2

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

Transportation volumes recovering

Following a couple of years of commodity-price and economic sanctions-led declines, rail-freight transportation volumes in Russia are showing strong signs of recovery. Q216 volumes in Russia increased by 13.2%, largely due to a 20.7% increase in domestic transportation, while TRC’s volumes increased by 12.0% in the period.

Profitability recovery underway with upside potential

In H116, TransContainer’s adjusted EBITDA margin recovered to 32.1% vs 28.4% in H115 as revenues improved and management’s focus on costs began to deliver. EBITDA margins in Q216 were 35.2%, showing an upwards trajectory. H215 margins were 35.7% illustrating that TRC’s margins are typically H2 weighted – a trend confirmed by management on the H116 conference call. We remain comfortable with our unchanged FY16 adjusted EBITDA margin (TRC definition) forecast of 34.8%.

Valuation: Optically attractive, country risk weighs

Trading on an FY17e EV/EBITDA multiple of 6.9x vs its international peers on 8.1x, TRC continues to look attractive. High cash flow generation is an important part of the equity proposition and price to operating cash flow (FY16 Edison estimate) is 6.6x. However, for now we maintain our assumed WACC of 13.1%, which while high is justified and therefore penalises our fair value. Our unchanged fair value remains RUB3,400 per share and, while we continue to believe in the attractive earnings proposition, we regard our prudent valuation approach to be appropriate.

Improving market conditions and profitability

Momentum returns to Russian rail-freight market…

Overall, the Russian rail container market saw volumes increase by 6.1% in H116 vs H115. The market continues to display strong signs of improvement with volumes growing by 13.2% in Q216. More striking is the rapid acceleration in volume recovery in the second quarter. TRC transported 12% more freight by volume in Q216 vs Q215. Of particular note were the respective 15.2%, 15.8% and 11.9% increases in freight transported on domestic routes, export routes and import routes. Transit routes provided the only disappointment in Q216 with a 29.0% decline explained by sharp drops in auto production in Uzbekistan and Kazakhstan.

Importantly, high levels of growth appear to be continuing into H216. The market grew by 7.5% y-o-y in the first eight months of 2016 according to TRC, while July witnessed an 8% y-o-y increase. In the H116 earnings announcement and conference call, TRC management sounded upbeat on market dynamics. Therefore, there is much evidence to support the markedly improving earnings environment already incorporated into our forecasts.

…driving enhanced profitability and outlook at TransContainer

TransContainer ascribes its improving financial performance to “the market recovery along with the continuing business optimization measures.” Overall, the performance in H116 showed a strong improvement, with Q216 notably stronger than Q116. Adjusted revenue increased slightly by 0.7% H116-on-H115, whereas the equivalent figure for Q216-on-Q215 was 10.7%. Adjusted operating expenses were down 2.2% H116-on-H115, albeit with a small increase Q216-on-Q215, leading to an enhanced EBITDA margin of 35.2%. For now, we maintain our FY16 EBITDA margin forecast at 34.8% to be prudent, but will watch the market and TRC closely in case we need to update our estimates.

Exhibit 1: TransContainer H116-on-H115 financial performance

(RUBbn)

H115

H116

H-o-H (%)

Integrated freight forwarding and logistics services

 

6,162

6,179

0.3

Rail-based container shipping services

 

2,129

2,015

-5.4

Terminal services and agency fees

 

987

1,094

10.8

Truck deliveries

 

399

419

5.0

Other freight forwarding services

 

70

99

41.4

Bonded warehousing services

 

92

95

3.3

Other

 

48

56

16.7

Total adjusted revenue

 

9,887

9,957

0.7

EBITDA

 

2,804

3,192

13.8

Adjusted EBITDA margin (%)

 

28.4

32.1

 

Profit for the period

 

1,039

1,412

35.9

Adjusted net profit margin (%)

 

10.5

14.2

 

Source: TransContainer

Integrated freight forwarding: TRC’s adjusted revenue increased by 0.3% h-o-h. Within this, Q116 vs Q115 showed a drop, while Q216 increased by 9.5% vs Q215 due to a turnaround in transportation volumes.

Rail-based container transportation services: Despite a 3.2% Q216 vs Q215 increase in revenues, this division declined 5.4% h-o-h reflecting, according to TRC, “the continuing shift of customers’ preferences towards integrated logistics services.”

Terminal services and agency fees: Higher transportation volumes together with higher tariffs charged were behind the very high rate of revenue growth (+10.8% h-o-h) in this business.

Truck deliveries: The 5% h-o-h revenue growth in truck deliveries was mainly due to a 3.2% increase in transportation volumes.

Other freight forwarding and logistics: Revenues increased by 41.4% h-o-h to RUB99m in response to customer demand for value added services.

Bonded warehousing: The 3.3% h-o-h decline in revenues from RUB95m to RUB92m is small in a group context.

Operating expenses: Adjusted operating expenses (excluding third-party charges) decreased by 2.2% vs H115. The drop reflected declining freight and transportation, and rent expenses. While we note that Q216 vs Q215 showed a slight uptick (1.0%) in adjusted costs, primarily due to increases in materials, repair and maintenance, we remain confident in our full year adjusted operating expense forecast of RUB18,391m, an increase of 3% y-o-y. Even with this, in our view prudent, increase in costs, we forecast that TRC will be able to expand its margins by 2.7% y-o-y. TRC management continues to focus on reducing costs.

Cash flow: Operating performance finances capex and returns

A 13.8% increase in H116 vs H115 EBITDA and a much higher 59.5% increase in Q216 vs Q215 EBITDA give us confidence in our forecast FY16 EBITDA growth figure of 16.4%. Over H116, higher operating profit drove a 31.6% increase in cash flow from operations. In keeping with its policy of financing capital expenditure from internal cash flows, higher operating cash flow was used to finance the RUB594m increase in capex (330.0% H116 vs H115). With nearly RUB3bn of operating cash flow generated in H116, the capex budget of RUB3.8bn was reiterated by management during the earnings call and incorporated into our forecasts is well covered.

Strong earnings growth, albeit the WACC depresses our FV

TRC’s double-digit EBITDA growth, coupled with our FY17e EV/EBITDA estimate of 6.9x vs its global peers trading on 8.1x means that optically it offers value for investors. Furthermore, its +1year P/E multiple (Edison) is equally attractive at 11.3x vs its global peers on 17.5x. TRC’s most attractive earnings attribute is its high level of cash flow generation – currently the stock is trading on an operating FCF yield of 15% (FY17e), well above its international peers on 4.1% and this will increase on our forecasts.

TRC suffers from the high degree of country risk in Russia. Our unchanged post-tax WACC of 13.1% (risk-free rate of 4.0%, Beta 1.0, equity risk premium of 9.6%, debt premium 6.0%, tax of 21%, debt weighting of 9.3%) weighs on our equity fair value. We acknowledge the sterling job management has done in managing costs, capital structure and the economic downturn. However, the Russian economy remains sensitive to geopolitical factors and the depressed commodity price environment so we maintain our cost of capital at this stage and our fair value is unchanged at RUB3,400 per share, slightly beneath the current market price.

What next?

TRC has called an EGM on 9 September to approve its dividend payment. We also expect Q3 results sometime in late November where we expect to hear further evidence of the continued improvement in TRC’s operating environment, profitability and any further update on the proposed RUB 3,800m capex plan. Management highlighted that that this programme is “subject to market conditions” and that the budget will be invested in ISO containers and improvements in terminal infrastructure. If the market improvement continues, this budget could be increased.

Exhibit 2: Transport comparative valuation sheet

Market Cap (local m)

Current EV/ EBITDA

Next EV/ EBITDA

Current P/E

Next P/E

FCF Yield

Div Yield This Yr

Moscow Exchange MICEX-RTS PJSC

11.6x

12.3x

5.7%

 

European Transport

 

TransContainer PJSC

Russia

51,133

8.0x

6.9x

14.0x

11.3x

6.44%

1.8%

Globaltrans Investment PLC

Cyprus

840

1.1x

1.0x

16.4x

12.5x

16.64%

3.5%

PKP Cargo SA

Poland

1,939

4.7x

3.7x

-41.6x

30.6x

-4.45%

0.0%

VTG AG

Germany

786

7.1x

6.8x

16.8x

13.5x

1.81%

2.3%

Average

 

4.9x

4.3x

1.4x

16.9x

5.11%

1.89%

 

Emerging markets transport

 

China Railway Tielong Container Logistics Co Ltd

China

9,517

17.5x

18.3x

34.1x

31.7x

1.38%

0.9%

Daqin Railway Co Ltd

China

94,255

7.1x

7.2x

12.0x

11.7x

7.26%

4.1%

Guangshen Railway Co Ltd

China

23,965

6.9x

6.4x

23.4x

20.6x

4.25%

2.0%

Average

 

10.5x

10.6x

23.2x

21.3x

4.30%

2.33%

 

Developed market transport

Canadian Pacific Railway Ltd

Canada

9,517

11.4x

10.7x

18.9x

16.5x

3.32%

0.9%

Union Pacific Corp

US

94,255

10.0x

9.3x

19.1x

17.0x

3.98%

0.0%

Norfolk Southern Corp

US

23,965

10.0x

9.3x

19.1x

17.0x

3.98%

2.4%

Canadian National Railway Co

Canada

29,692

11.6x

11.0x

18.9x

17.2x

3.93%

2.5%

Genesee & Wyoming Inc

US

3,936

11.6x

11.0x

18.9x

17.2x

3.93%

1.8%

CSX Corp

US

27,254

8.2x

7.7x

16.5x

15.0x

3.15%

0.0%

Aurizon Holdings Ltd

Australia

8,987

8.2x

7.7x

16.5x

15.0x

3.15%

2.5%

Average

10.1x

9.5x

18.3x

16.4x

3.63%

1.44%

Overall Transport Average

8.5x

8.1x

14.1x

17.5x

4.13%

2.21%

Source: Bloomberg, Edison Investment Research, Priced at 8 September 2016

Exhibit 3: Financial summary

RUBm

2014

2015

2016e

2017e

2018e

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

20,538

20,311

21,849

23,664

25,211

26,890

28,710

EBITDA (company definition)

 

 

7,816

6,526

7,599

8,771

9,533

10,294

11,125

EBITDA (Edison definition)

 

 

6,544

5,744

6,778

7,826

8,492

9,149

9,861

Operating Profit (before amort. and except.)

4,083

3,274

4,269

5,231

5,739

6,226

6,756

Intangible Amortisation

0

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

0

Other

0

0

0

0

0

0

0

Operating Profit

4,083

3,274

4,269

5,231

5,739

6,226

6,756

Net Interest

(497)

(356)

(360)

(303)

(282)

(258)

(229)

Share of assocs/JVs gains/(losses)

165

612

673

741

815

896

986

Forex gains/(losses

938

0

0

0

0

0

0

Other

18

18

0

0

0

0

0

Profit Before Tax (norm)

 

 

3,751

3,530

4,582

5,669

6,272

6,864

7,514

Profit Before Tax (FRS 3)

 

 

4,707

3,548

4,582

5,669

6,272

6,864

7,514

Tax

(1,049)

(717)

(962)

(1,190)

(1,317)

(1,442)

(1,578)

Profit After Tax (norm)

2,702

2,813

3,620

4,478

4,955

5,423

5,936

Profit After Tax (FRS 3)

3,658

2,831

3,620

4,478

4,955

5,423

5,936

Average Number of Shares Outstanding (m)

13.7

13.7

13.7

13.7

13.7

13.7

13.7

EPS - normalised (RUB)

 

 

286.0

138.7

264.4

327.0

361.8

396.0

433.5

EPS - normalised and fully diluted (RUB)

 

286.0

138.7

264.4

327.0

361.8

396.0

433.5

EPS - (IFRS) (RUB)

 

 

267.1

206.7

264.4

327.0

361.8

396.0

433.5

Dividend per share (RUB)

71.0

51.7

66.1

81.8

90.5

99.0

108.4

EBITDA Margin (%)

31.9

28.3

31.0

33.1

33.7

34.0

34.3

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

19.9

16.1

19.5

22.1

22.8

23.2

23.5

BALANCE SHEET

Fixed Assets

 

 

42,012

41,739

43,030

45,404

47,945

50,669

53,594

Intangible Assets

210

246

246

246

246

246

246

Tangible Assets

37,900

37,827

39,118

41,492

44,033

46,757

49,682

Investments

3,343

3,023

3,023

3,023

3,023

3,023

3,023

Other

559

643

643

643

643

643

643

Current Assets

 

 

6,965

7,435

8,498

9,115

9,789

10,580

11,493

Stocks

340

315

339

367

391

417

445

Debtors

1,542

1,392

1,497

1,622

1,728

1,843

1,968

Cash

1,904

2,110

2,925

3,225

3,568

3,982

4,491

Other

3,179

3,618

3,737

3,902

4,102

4,337

4,590

Current Liabilities

 

 

(5,581)

(6,747)

(6,862)

(7,021)

(7,215)

(7,441)

(7,685)

Creditors

(3,084)

(3,405)

(3,520)

(3,679)

(3,873)

(4,099)

(4,343)

Short term borrowings

(919)

(1,893)

(1,893)

(1,893)

(1,893)

(1,893)

(1,893)

Other

(1,578)

(1,449)

(1,449)

(1,449)

(1,449)

(1,449)

(1,449)

Long Term Liabilities

 

 

(8,151)

(6,240)

(6,240)

(6,240)

(6,240)

(6,240)

(6,240)

Long term borrowings

(5,458)

(3,744)

(3,744)

(3,744)

(3,744)

(3,744)

(3,744)

Other long term liabilities

(2,693)

(2,496)

(2,496)

(2,496)

(2,496)

(2,496)

(2,496)

Net Assets

 

 

62,709

62,161

64,630

67,780

71,189

74,930

79,013

CASH FLOW

Operating Cash Flow

 

 

7,617

5,437

6,644

7,668

8,355

8,999

9,699

Net Interest

(557)

(394)

(360)

(303)

(282)

(258)

(229)

Tax

(964)

(727)

(962)

(1,190)

(1,317)

(1,442)

(1,578)

Capex

(4,136)

(2,400)

(3,800)

(4,970)

(5,294)

(5,647)

(6,029)

Acquisitions/disposals

(75)

(12)

0

0

0

0

0

Financing

199

0

0

0

0

0

0

Dividends

(1,117)

(974)

(708)

(905)

(1,120)

(1,239)

(1,356)

Other

199

0

0

0

0

0

0

Net Cash Flow

967

930

815

300

343

415

508

Opening net debt/(cash)

 

 

6,004

4,473

3,527

2,712

2,412

2,069

1,655

HP finance leases initiated

0

0

0

0

0

0

0

Other

564

16

0

0

0

0

0

Closing net debt/(cash)

 

 

4,473

3,527

2,712

2,412

2,069

1,655

1,146

Source: Edison Investment Research, TransContainer data

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US

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Wellington +64 (0)48 948 555

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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

IFG Group — Update 8 September 2016

IFG Group

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