TransContainer — Update 1 December 2016

TransContainer — Update 1 December 2016

TransContainer

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TransContainer

Runaway market growth

Q3 results

General industrials

1 December 2016

Price

RUB3,700

Market cap

RUB51bn

RUB65.0/US$

Net cash (RUBm) at 30 September 2016

310

Shares in issue

13.7m

Free float

50%

Code

TRCN

Primary exchange

MCIX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

1.2

0.4

72.1

Rel (local)

(4.3)

(6.0)

44.8

52-week high/low

RUB4,120

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 events

FY16 results announcement

March 2017

Analysts

Jamie Aitkenhead

+44 (0)20 3077 5746

Roger Johnston

+44 (0)20 3077 5722

TransContainer is a research client of Edison Investment Research Limited

TransContainer’s (TRC) nine-month and Q3 results announcement on 28 November was in line with Edison and market expectations. We leave our forecasts unchanged, but acknowledge that if the Russian rail container market continues to grow at the rate witnessed in recent months, our estimates (five-year EBITDA CAGR 11.3%) will look conservative. We await full year results, which we expect in late March, for a management update on rail container market growth.

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.

Rail containerisation: A runaway success

The main story from TRC’s nine-month and Q3 numbers was the rapid acceleration in growth in its underlying Russian rail container market, which grew 8.2% in comparison to the first nine months of 2015. Growth appears to be accelerating further with an increase in volumes of 18.6% y-o-y in October 2016 according to the RZD Information Centre. With a market share of 47.2% and a modern integrated rail container fleet and service offering, TRC is well placed to offer equity holders exposure to this growth market.

Profitability and cash flow along the right tracks

TRC was able to capitalise on market growth, with a 7.3% increase in volumes feeding into a 13.7% increase in EBITDA 9M16 on 9M15. The 300bp increase in adjusted EBITDA margin came despite increases in maintenance and repair costs and helped drive the group to a net cash position of RUB310m on 30 September even after a 49.7% increase in capex. That said, we expect TRC’s capital budget to increase substantially over the balance of the year and in 2017. Management has guided to RUB3,800m of capex in total this year (implying nearly RUB2,500m in Q4) with a further increase in 2017. Our capex forecasts are already in line with this. It is worth noting that given TRC’s low level of indebtedness and strong operating cash flow, management has ample room to invest in infrastructure and flat cars as the market continues to expand.

Valuation: Optically attractive, country risk weighs

TRC trades at a steep discount to its closest peers internationally on both P/E and EV/EBITDA multiples. However, a one-year forward P/E of 11.5x versus the sector on 17.6x and one-year forward EV/EBITDA of 5.4x versus 8.1x only tells part of the story. We believe it is still fair to reduce TRC’s rating to reflect political risk in Russia. On that basis, we retain our fair value per share of RUB3,400, an 8% discount to its current share price.

Russian rail container market lifting off

While TRC’s results showed solid progress and improving profitability, we believe the main takeaway from the announcement was the significant growth seen in the overall Russian rail container market. The Russian rail container market grew 8.2% in the first nine months of the year, while Q3 growth was 12.4%. The growth trend seems to be accelerating. Management reported that in October the market grew by 18.3% compared to a year earlier and continues to attribute the growth to the increasing overall market share taken by rail containers at the expense of other modes of transport.

Across all routes, TRC transported 1.118m 20-foot equivalent units in the first nine months of 2016, a 7.3% increase on 9M15. In common with the overall market, TRC is enjoying an accelerating growth rate with Q3 volumes across all routes up 12.9% vs 3Q15. We continue to forecast that revenues will rise by a higher percentage in 2017 than 2016 in our unchanged forecasts and the data points we have so far in Q416 seem to reinforce our stance at this early stage.

Exhibit 1: TransContainer H116 vs H115 financial performance

RUB (bn)

9M15

9M16

9M-on-9M

Q315

Q316

Q3-on-Q3

Integrated freight forwarding and logistics services

9,329

9,871

5.8%

3,167

3,692

16.6%

Rail-based container shipping services

3,291

3,057

-7.1%

1,162

1,042

-10.3%

Terminal services and agency fees

1,580

1,723

9.1%

593

629

6.1%

Truck deliveries

633

657

3.8%

234

238

1.7%

Other freight forwarding services

102

159

55.9%

32

60

87.5%

Bonded warehousing services

141

147

4.3%

49

52

6.1%

Other

77

81

5.2%

29

25

-13.8%

Total adjusted revenue

15,153

15,695

3.6%

5,266

5,738

9.0%

EBITDA

4,660

5,298

13.7%

1,856

2,106

13.5%

Adjusted EBITDA margin

30.8%

33.8%

 

35.2%

36.7%

 

Profit for the period

1,925

2,641

37.2%

886

1,159

30.8%

Adjusted net profit margin

12.7%

16.8%

 

16.8%

20.2%

 

Source: TransContainer

Integrated freight forwarding and logistics: The 5.8% 9M y-o-y revenue increase was driven by increased volumes across TRC’s domestic, import and export markets. The rate of growth increased in Q3 to 16.6%. As the largest business line, this unit accounts for the largest portion of the 3.6% increase in total group adjusted revenue for the first nine months.

Rail-based container transportation services: The 7.1% y-o-y (-10.3% Q3-on-Q3) decline in revenues – the only decline in revenues in the first nine months – was driven, according to management, by customers continuing to switch to integrated logistics services.

Terminal services and agency fees: Tariff increases were the main driver behind the 9.1% y-o-y (6.1% Q3-on-Q3) revenue increases in this unit. Volumes were broadly flat.

Truck deliveries: The 3.8% y-o-y (1.7% Q3-on-Q3) increase in revenues was due to an increase in TRC’s and third-party volumes over the first nine months, with a tariff increase more than offsetting a drop in volumes in the third quarter.

Other freight forwarding and logistics: From a very low base, TRC’s other freight forwarding business grew at a y-o-y rate of 55.9% (87.5% Q3-on-Q3) due to customer demand for value add services together with recovering freight volumes.

Bonded warehousing: The 4.3% increase in the first nine months (6.1% Q3-on-Q3) was driven by increased import volumes.

Operating expenses: Adjusted operating expenses (excluding third-party charges) increased 1.9% y-o-y to RUB13,334m due to an increase in materials, maintenance, repair and payroll costs offset by declining rent and freight and transportation expenses. It is noteworthy that Q3-on-Q3 adjusted operating expenses increased by 10% to RUB4,744m with a sharp spike in materials and repair and maintenance behind the increase. Adjusted operating expenses as a percentage of adjusted revenue decreased from 86.3% in 9M15 to 85.0%.

Cash flow: Strong cash generation behind net cash position

Cash flow from operations grew by 33.8% y-o-y to RUB4,426m with the strong operating performance the main driver of growth. Capex increased to RUB1,326m from RUB886m. The 49.7% increase versus 9M15 was predominantly invested in the reconstruction and expansion of container terminals in Krasnoyarsk, Yekaterinburg and Irkutsk as well as in acquiring ISO containers. Management guided to RUB3,800m capex spend for FY16, in line with our forecasts, and indicated on the earnings call that capex would increase again in FY17. Despite the increase in capex spend, and due to the increase in operating cash flow and cash flow from financing, TRC increased its cash position to RUB9,180m vs RUB2,748 one year ago, leaving it in a net cash position of RUB310m versus net debt of RUB3,032m one year earlier.

Valuation: Cheap on multiples, country risk remains

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

287,176

11.3x

12.0x

-7.24%

5.7%

 

European Transport

 

Globaltrans Investment

Cyprus

751

1.2x

1.0x

14.8x

11.4x

16.64%

3.8%

PKP Cargo

Poland

1,993

4.8x

3.8x

-42.7x

31.5x

-4.45%

0.0%

VTG

Germany

802

7.1x

6.8x

17.5x

13.8x

1.81%

2.2%

Average

 

4.4x

3.9x

-3.4x

18.9x

4.67%

2.02%

 

Emerging markets transport

 

China Railway Tielong Container Logistics Co

China

9,139

16.6x

17.4x

32.7x

30.3x

1.38%

0.9%

Daqin Railway Co

China

94,107

6.7x

6.8x

11.9x

11.6x

7.26%

4.2%

Guangshen Railway Co

China

24,135

7.0x

6.5x

23.7x

20.8x

4.25%

1.9%

Average

 

10.1x

10.2x

22.8x

20.9x

4.30%

2.36%

 

Developed market transport

Canadian Pacific Railway

Canada

29,712

11.4x

10.7x

19.0x

16.5x

3.32%

0.9%

Union Pacific

United States

79,527

9.9x

9.2x

19.0x

16.8x

3.98%

2.4%

Norfolk Southern

United States

27,626

9.0x

8.4x

17.3x

15.5x

1.93%

2.5%

Canadian National Railway Co

Canada

65,192

11.7x

11.0x

18.9x

17.3x

3.93%

1.8%

Genesee & Wyoming

United States

3,928

11.0x

10.2x

19.3x

18.0x

4.77%

0.0%

CSX Corp

United States

26,828

8.1x

7.6x

16.3x

14.7x

3.15%

2.6%

Aurizon Holdings

Australia

9,007

8.2x

8.0x

16.4x

16.2x

3.49%

5.8%

Average

9.9x

9.3x

18.0x

16.4x

3.51%

2.28%

TransContainer

Russia

51,341

6.3x

5.4x

14.2x

11.5x

6.44%

1.8%

Overall Transport Average

8.5x

8.1x

14.2x

17.6x

4.13%

2.21%

Source: Bloomberg, Edison Investment Research. Note: Priced at 29 November 2016.

TRC trades on a 34.6% discount to the average one-year forward P/E multiple of its closest transport peers. It also trades on a 33.3% discount to the average one-year forward EV/EBITDA. However, we believe TRC should remain on a significant discount to its closest international peers given the degree of political risk in Russia. Management has shown its ability to manage capital and operating cash flow during the downturn and TRC is well placed to capitalise on the upturn in the rail container market in Russia. However, we still need to see evidence of improving geopolitical relations in Russia to upgrade our fair value per share of RUB3,400.

Exhibit 3: Financial summary

RUBm

2014

2015

2016e

2017e

2018e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

20,538

20,311

21,849

23,664

25,211

EBITDA (company definition)

 

 

7,816

6,526

7,599

8,771

9,533

EBITDA (Edison definition)

 

 

6,544

5,744

6,778

7,826

8,492

Operating Profit (before amort. and except.)

4,083

3,274

4,269

5,231

5,739

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

4,083

3,274

4,269

5,231

5,739

Net Interest

(497)

(356)

(360)

(303)

(282)

Share of assocs/jvs gains/(losses)

165

612

673

741

815

Forex gains/(losses

938

0

0

0

0

Other

18

18

0

0

0

Profit Before Tax (norm)

 

 

3,751

3,530

4,582

5,669

6,272

Profit Before Tax (FRS 3)

 

 

4,707

3,548

4,582

5,669

6,272

Tax

(1,049)

(717)

(962)

(1,190)

(1,317)

Profit After Tax (norm)

2,702

2,813

3,620

4,478

4,955

Profit After Tax (FRS 3)

3,658

2,831

3,620

4,478

4,955

Average Number of Shares Outstanding (m)

13.7

13.7

13.7

13.7

13.7

EPS - normalised (RUB)

 

 

286.0

138.7

264.4

327.0

361.8

EPS - normalised and fully diluted (RUB)

 

286.0

138.7

264.4

327.0

361.8

EPS - (IFRS) (RUB)

 

 

267.1

206.7

264.4

327.0

361.8

Dividend per share (RUB)

71.0

51.7

66.1

81.8

90.5

EBITDA Margin (%)

31.9

28.3

31.0

33.1

33.7

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

19.9

16.1

19.5

22.1

22.8

BALANCE SHEET

Fixed Assets

 

 

42,012

41,739

43,030

45,404

47,945

Intangible Assets

210

246

246

246

246

Tangible Assets

37,900

37,827

39,118

41,492

44,033

Investments

3,343

3,023

3,023

3,023

3,023

Other

559

643

643

643

643

Current Assets

 

 

6,965

7,435

8,498

9,115

9,789

Stocks

340

315

339

367

391

Debtors

1,542

1,392

1,497

1,622

1,728

Cash

1,904

2,110

2,925

3,225

3,568

Other

3,179

3,618

3,737

3,902

4,102

Current Liabilities

 

 

(5,581)

(6,747)

(6,862)

(7,021)

(7,215)

Creditors

(3,084)

(3,405)

(3,520)

(3,679)

(3,873)

Short term borrowings

(919)

(1,893)

(1,893)

(1,893)

(1,893)

Other

(1,578)

(1,449)

(1,449)

(1,449)

(1,449)

Long Term Liabilities

 

 

(8,151)

(6,240)

(6,240)

(6,240)

(6,240)

Long term borrowings

(5,458)

(3,744)

(3,744)

(3,744)

(3,744)

Other long term liabilities

(2,693)

(2,496)

(2,496)

(2,496)

(2,496)

Net Assets

 

 

62,709

62,161

64,630

67,780

71,189

CASH FLOW

Operating Cash Flow

 

 

7,617

5,437

6,644

7,668

8,355

Net Interest

(557)

(394)

(360)

(303)

(282)

Tax

(964)

(727)

(962)

(1,190)

(1,317)

Capex

(4,136)

(2,400)

(3,800)

(4,970)

(5,294)

Acquisitions/disposals

(75)

(12)

0

0

0

Financing

199

0

0

0

0

Dividends

(1,117)

(974)

(708)

(905)

(1,120)

Other

199

0

0

0

0

Net Cash Flow

967

930

815

300

343

Opening net debt/(cash)

 

 

6,004

4,473

3,527

2,712

2,412

HP finance leases initiated

0

0

0

0

0

Other

564

16

0

0

0

Closing net debt/(cash)

 

 

4,473

3,527

2,712

2,412

2,069

Source: TransContainer, Edison Investment Research

dison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by TransContainer and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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dison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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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

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

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

Tonix Pharmaceuticals — Update 1 December 2016

Tonix Pharmaceuticals

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