TransContainer — Update 1 December 2016

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

industrials@edisongroup.com

Edison profile page

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

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