Another beat, with structural and cyclical drivers

TransContainer 11 September 2019 Update
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TransContainer

Another beat, with structural and cyclical drivers

Q2/H119 results

General industrials

11 September 2019

Price

RUB9,025

Market cap

RUB125bn

Net debt (RUBm) at H1

8,417

Shares in issue

13.9m

Free float

0.43%

Code

TRCN

Primary exchange

MICEX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

26.2

45.7

104.2

Rel (local)

21.3

43.3

71.1

52-week high/low

RUB9025

RUB4300

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

Auction for 50% stake sale

27 November 2019

Q3 results

November 2019

Analyst

Dario Carradori

+44 (0)20 3077 5700

TransContainer is a research client of Edison Investment Research Limited

Both cyclical and structural factors drove strong revenue growth in H119 (adjusted revenues up 32% y-o-y, above our expectations) which, combined with efficiency gains and economies of scale, led to EBITDA growth of 67% y-o-y and net income almost doubling. We forecast growth to continue, albeit at a more moderate pace, as we expect a stabilisation in rail container transportation prices. We have significantly increased our forecasts, which drives a 33% increase in our valuation to RUB9,460/share.

Year end

Revenue (RUBm)

PBT*
(RUBm)

EPS*
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/17

27,782

8,147

448

293

20.1

3.2

12/18

31,288

10,263

561

480

16.1

5.3

12/19e

40,229

17,248

984

484

9.2

5.4

12/20e

47,858

22,021

1,252

626

7.2

6.9

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

H1 results boosted by volume and price growth

In H119, TransContainer experienced strong volume and price increases, which led to strong revenue and profit growth, ahead of our expectations. Adjusted revenues grew 32% y-o-y and net income almost doubled to RUB6.1bn. TransContainer benefited from strong cyclical growth in certain industries, such as the timber (+34% y-o-y transported volumes for TransContainer) and auto and components industries (+22% y-o-y), which represent a large portion of the volumes transported albeit a limited share of Russian GDP.

Forecasts raised again

TransContainer has consistently beat our expectations over the last 12 months and we increase our forecasts again following the H119 results (revenue up 10% in FY19 and 16% in FY20, and net income up 29% in FY19 and 44% in FY20). We believe the structural trend towards containerisation should continue to support growth. However, our forecasts reflect some moderation in revenue growth rates vs H1 (+32% y-o-y) to reflect the risks to the Russian economy and the likely stabilisation in prices. We now expect 26% adjusted revenue growth in H219 and a 16% increase in FY20.

Valuation: Share price doubled but multiples little changed

TransContainer’s share price has continued to rise since the Q1 results and has now doubled year to date. We believe the recent strong results and the increase in future earnings expectations were the key drivers. However, the share price rise was not accompanied by a large re-rating, with the stock still trading at c 9x 2019e P/E. Hence, despite the share price rise, the stock remains at a discount to peers in both emerging markets and developed markets, which is at least partly explained by the limited liquidity, in our view. Following our forecasts revisions, we have significantly increased our DCF-based valuation to RUB9,460 /share (from RUB7,100/share). If the auction to sell a 50% stake in TransContainer to a Russian investor on 27 November 2019 results in an increased free float for the stock, we would see room for a re-rating.

Structural and cyclical drivers support FY19 results

We believe TransContainer is benefiting from both cyclical and structural growth trends in FY19. The two drivers combined led to a very strong revenue pick-up in H119 (adjusted revenue was up 32% y-o-y), which, compounded with economies of scale, led to EBITDA growth of 67% y-o-y and net income almost doubling. We forecast growth to continue, albeit at more moderate pace, reflecting our expectations of a stabilisation in prices but continued volume growth. We have significantly increased our forecasts, which has led us to increase our DCF-based valuation by 33% to RUB9,460/share.

Q2/H119: Another strong set of results

TransContainer reported another strong set of results, with:

Total revenues for H119 of RUB41.5bn, up 17% y-o-y (with Q2 revenues growing strongly, up 15% y-o-y, albeit slower than Q1’s 20% y-o-y). Adjusted revenues (net of subcontractors’ charges) were up 32% y-o-y to RUB18.5bn. As revenue-generating transportation volumes grew 11.2%, revenues also benefited from significant price growth.

H119 EBITDA grew 67% to RUB9.4bn with margins expanding to 50.7% from 40.0% one year earlier. We believe this expansion was driven by economies of scale and other efficiency gains, including a higher proportion of containers transported in block trains, for which TransContainer receives a discount from Russian Railways as these trains take up less capacity on the railway.

H119 profit before tax grew 91% to RUB7.7bn thanks to slower growth in adjusted operating expenses (+11% y-o-y) than revenues.

H119 net income almost doubled to 6.1bn (vs RUB3.2bn one year earlier).

Based on TransContainer data, the H1 growth was strengthened by a strong pick-up in orders from South Korea and China. While Russia represents 80% of H119 total sales (Exhibit 1), it explains only 46% of the year-on-year sales increase (Exhibit 2), with the rest of the growth driven mostly by China and South Korea.

Exhibit 1: H1 total sales split by client location

Exhibit 2: Increase in H1 total sales by client location

Source: TransContainer data, Edison Investment Research

Source: TransContainer data, Edison Investment Research

Exhibit 1: H1 total sales split by client location

Source: TransContainer data, Edison Investment Research

Exhibit 2: Increase in H1 total sales by client location

Source: TransContainer data, Edison Investment Research

Macroeconomic and industry context

TransContainer’s ability to attract orders outside of Russia is sustaining its growth while the domestic economy is weak. Both the market and TransContainer benefited from strong cyclical growth in certain industries, such as the timber (+34% y-o-y transported volumes for TransContainer) and auto and components industries (+22% y-o-y), which represent a large portion of the volumes transported albeit a limited share of Russian GDP (timber volumes represent c 20% of TransContainer’s volumes, while auto and components c 7%).

Exhibit 3: Percentage change in transported volumes by type of cargo

Source: TransContainer

Total volumes for Russian rail container transportation increased significantly in H1 (+15.1% y-o-y) and July rail container volumes were up 10.5% y-o-y (Exhibit 4). The growth rate is well above the historical CAGR of 9.3% (2001–18). TransContainer maintains the highest market share in rail-based container transportation in Russia, with a 42% share in H119, albeit this reduced three percentage points vs the previous year.

Exhibit 4: Russian monthly rail container transportation volumes

Source: TransContainer, RZD Information Centre

The strong growth in transported volumes and TransContainer’s business is at odds with the evolution of the Russian economy. Russian GDP grew by only 0.9% y-o-y in Q2, only slightly stronger than Q1’s +0.5% y-o-y. With slow economic growth and a slowdown in inflation, the Russian central bank cut interest rates again at the end of July and once more in September. 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. In this respect, TransContainer’s ability to grow internationally through increased sales to other Asian customers (mostly China) increases the resilience of its business model and reduces risks for the company.

In addition to the cyclical drivers set out above, we believe TransContainer continues to enjoy structural growth from containerisation, which we believe should support revenue and profit growth for the company in the coming years. Currently, only c 7% 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%).

Even though timber transport volumes were a key driver for TransContainer in H1, we note that the Russian government has recently threatened to ban timber exports to China unless the country cooperates to mitigate the impact of illegal timber logging in Russia (Reuters 15 August 2019); reduced timber exports would have a negative impact on TransContainer’s business (these volumes represent c 20% of volumes transported in H119). We currently assume no impact from the potential export ban.

Forecasts increased significantly

We previously expected a moderation in revenue growth in the remaining quarters of FY19, reflecting the risks from a slowing Russian economy, but growth continued to be very strong in Q2 and ahead of our expectations. TransContainer has consistently beat our forecasts over the last 12 months and we increase our forecasts again following the recent results.

Exhibit 5: Forecasts changes

RUBm

2018

2019e

2020e

Adjusted revenue

New

31,288

40,229

47,858

Old

36,480

41,090

% change

10%

16%

EBIT

New

10,415

17,779

23,122

Old

14,304

16,901

% change

24%

37%

Net income

New

9,509

13,456

17,396

Old

10,445

12,072

% change

29%

44%

Net debt

New

1,779

7,661

10,415

Old

8,256

17,064

% change

-7%

-39%

Source: TransContainer data, Edison Investment Research

We believe the structural trend towards containerisation should continue to support growth. However, our forecasts reflect some moderation in growth rates vs H1 (+32% y-o-y) to reflect the risks to the Russian economy and the likely stabilisation in rail container transportation prices. We project 26% adjusted revenue growth in H219 and a 16% increase in FY20.

Valuation: DCF increased to RUB9,460 a share

TransContainer’s share price has continued to rise since the Q1 results and has now roughly doubled year-to-date. We believe the recent strong results and the increase in future earnings expectations were the key drivers. However, the share price rise was not accompanied by a visible re-rating, with the stock trading still at c 9x 2019e P/E, at roughly the same level as the end of 2018. Hence, despite the share price rise, the stock remains at a discount to peers in both emerging markets and 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 Russian Railways plans to sell a 50% stake in TransContainer to a Russian investor at an upcoming auction set for 27 November 2019. If the sale results in an increased free float for the stock, we would see room for a re-rating.

Following our forecasts revisions, we have significantly increased our DCF-based valuation to RUB9,460/share (from RUB7,100/share). 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 RUB139.1bn and an equity value of RUB131.4bn). Our valuation implies 6.5x FY19e EV/EBITDA and 9.6x P/E.

The key downside and upside risks for the stock are a slowdown or pick-up in economic activity in Russia and rail container transportation volumes and, globally, higher or lower profit margins.

Exhibit 6: Financial summary

RUBm

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

27,782

31,288

40,229

47,858

EBITDA

10,252

13,342

21,542

27,599

EBIT

 

 

7,495

10,415

17,779

23,122

Operating Profit (before amort. and except.)

 

 

7,495

10,415

17,779

23,122

Intangible Amortisation

0

0

0

0

Exceptionals

306

1,715

(216)

0

Other

704

268

300

318

Operating Profit (post exceptionals)

8,505

12,398

17,863

23,440

Net Interest

(333)

(420)

(831)

(1,419)

Profit Before Tax (norm)

 

 

8,147

10,263

17,248

22,021

Profit Before Tax (FRS 3)

 

 

8,213

11,978

17,032

22,021

Tax

(1,638)

(2,469)

(3,577)

(4,624)

Profit After Tax (norm)

6,228

7,794

13,672

17,396

Profit After Tax (FRS 3)

6,575

9,509

13,456

17,396

Average Number of Shares Outstanding (m)

13.9

13.9

13.9

13.9

EPS - normalised (RUB)

 

 

448.2

560.9

983.9

1,252.0

EPS - normalised fully diluted (RUB)

 

 

448.2

560.9

983.9

1,252.0

EPS - (IFRS) (RUB)

 

 

473.2

684.4

968.4

1,252.0

Dividend per share (RUB)

293.0

480.4

484.2

626.0

EBITDA Margin (%) (company definition)

36.9

42.6

53.5

57.7

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

27.0

33.3

44.2

48.3

BALANCE SHEET

Fixed Assets

 

 

45,983

52,139

66,076

80,742

Intangible Assets

384

269

269

269

Tangible Assets

42,196

48,500

62,437

77,103

Investments

3,403

3,370

3,370

3,370

Current Assets

 

 

9,756

15,973

17,815

19,387

Stocks

287

222

285

340

Debtors

1,323

1,744

2,242

2,668

Cash

4,171

9,527

9,527

9,527

Other

3,975

4,480

5,760

6,853

Current Liabilities

 

 

(7,493)

(8,246)

(8,525)

(8,762)

Creditors

(6,068)

(7,920)

(8,199)

(8,436)

Short term borrowings

(457)

(931)

(931)

(931)

Long Term Liabilities

 

 

(7,879)

(13,805)

(19,687)

(22,441)

Long term borrowings

(4,987)

(10,980)

(16,862)

(19,616)

Other long term liabilities

(2,892)

(2,825)

(2,825)

(2,825)

Net Assets

 

 

40,367

46,061

55,679

68,925

CASH FLOW

Operating Cash Flow

 

 

10,670

14,267

22,484

28,718

Net Interest

(440)

(268)

(831)

(1,419)

Tax

(1,483)

(2,144)

(3,577)

(4,624)

Capex

(6,974)

(6,166)

(17,700)

(19,143)

Acquisitions/disposals

33

(1,868)

0

0

Financing

92

372

416

441

Dividends

(650)

(4,072)

(6,675)

(6,728)

Net Cash Flow

1,248

121

(5,882)

(2,754)

Opening net debt/(cash)

 

 

3,534

2,241

1,779

7,661

HP finance leases initiated

0

0

0

0

Other

45

341

0

0

Closing net debt/(cash)

 

 

2,241

1,779

7,661

10,415

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.

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.

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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.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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This document is prepared and provided by Edison 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.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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