FY18 results beat our estimates, forecasts raised

TransContainer 5 April 2019 Update
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TransContainer

FY18 results beat our estimates, forecasts raised

FY18 results update

General industrials

5 April 2019

Price

RUB5,230

Market cap

RUB72,174m

Net debt (RUBm) at end FY18

1,779

Shares in issue

13.8m

Free float

0.66%

Code

TRCN

Primary exchange

MICEX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

3.8

17.9

8.0

Rel (local)

1.2

11.9

(3.5)

52-week high/low

RUB5295

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

Q119 IFRS results

May 2019

Analyst

Dario Carradori

+44 (0)20 3077 5700

TransContainer is a research client of Edison Investment Research Limited

We have raised our FY19 and FY20 revenue forecasts by 3% and net income c 20%, following strong FY18 results that were above our expectations. We expect TransContainer to continue achieving sustained volume growth, benefiting from the structural trend towards growing containerisation and economic growth in Russia. We have increased our DCF-based valuation by 13% to RUB6,100/share.

Year end

Revenue (RUBm)

EBITDA*
(RUBm)

EPS**
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/17

27,782

10,252

448.2

293.0

11.7

5.6

12/18

31,288

13,342

560.9

342.2

9.3

6.5

12/19e

34,352

16,138

660.5

330.2

7.9

6.3

12/20e

37,833

18,065

742.3

371.1

7.0

7.1

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

Forecasts raised on the back of strong FY18 results

TransContainer posted strong growth in FY18, with adjusted revenues and net income respectively 3% and 15% higher than our forecasts. Results were better than our expectations, even though we recently upgraded net income by 26% following strong Q3 results. Adjusted revenues were up 12.6% to RUB31.3bn boosted by an increased share of higher value-added Integrated Freight Forwarding and Logistics Services. Operating profit grew 49% y-o-y to RUB11,559m, reflecting the strong revenue growth and expanding profit margins. We have raised our forecasts for FY19 and FY20, with revenues up 3% and net income up c 20%. We also expect net debt significantly lower than before, mainly due to lower-than-expected capex in FY18.

GDP growth and containerisation supports growth

Containerisation is a structural trend for the Russian market, and should support revenue and profit growth for TransContainer, in our view. 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%). GDP growth forecasts for Russia remain supportive with the World Bank estimating +1.5% for 2019 and +1.8% for 2020.

Valuation raised to RUB6,100/share

Even following the recent pick-up in the share price, we see room for further upside. We have raised our DCF-based valuation to RUB6,100/share (from RUB5,400) on the back of higher earnings estimates and lower than expected FY18 net debt. The stock is trading at a large discount to international transportation companies on P/E and EV/EBITDA multiples, respectively, which however may be at least partly explained by the limited liquidity of the stock and the higher country risk premium.

FY18 results beat our expectations, forecasts raised

We raise our forecasts (FY19 and FY20 adjusted revenues up 3%, net income up c 20%) following FY18 results that were above our expectations. Our DCF-based valuation increases to RUB6,100/share (from RUB5,400/share) and we highlight that the stock trades at a large discount to international peers.

FY18 results above our forecasts

TransContainer posted strong growth in FY18, with adjusted revenues and net income respectively 3% and 15% higher than our forecasts. Results were better than our expectations even though we recently raised net income by 26% following strong Q3 results (see Growth accelerating in Q3, forecasts raised, published on 6 December 2018).

Adjusted revenues were up 12.6% to RUB31,288m, boosted by an increased share of higher value-added Integrated Freight Forwarding and Logistics Services, which represented 81.5% of FY18 revenues (vs FY17: 76.5%; FY16: 64.2%). However, we note that the transition to integrated services has softened in the most recent quarters (Exhibit 1).

Exhibit 1: Integrated Freight Forwarding and Logistics services as % of adjusted revenues

Source: Company data

Operating profit grew 49% y-o-y to RUB11,559m, reflecting the strong revenue growth as well as expanding profit margins. We calculate that FY18 operating profit margin increased to 36.9% from 28.0% in FY17. We believe this expansion was driven by economies of scale (an overall increase in transportation volumes of 6.1% y-o-y), a shift to higher-margin integrated services activities (representing 81.5% of group revenues from 76.5%) and efficiencies, including an increase in the share of 'profit-making' runs (81.9% in FY18 vs 80.2% in FY17), as well as a higher proportion of containers transported in block trains, for which TransContainer receives a discount from Russian Railways as these trains use less capacity on the railway. Overall adjusted operating expenses increased by 2.8%, well below adjusted revenue growth of 12.6%. We see room for optimisation in empty runs in FY19 as their share rose in FY18 due to container cargo flow misbalances. However, the recent increase can be explained by the geographical expansion of the company rather than by inefficiencies. The internationalisation process forces the company to spend on empty containers’ transportation from foreign countries. Over time, as the business grows, we see room for lower spending.

Exhibit 2: Share of profit-making runs and share of containers transported in block trains

Source: Company data

Reported net income grew 46% y-o-y to RUB9,509m. Excluding exceptional items (FX, gains from acquisitions/disposals), we calculate that net income increased 25% y-o-y to RUB7,794m.

Net debt was also significantly lower than our expectations (RUB1,779m vs RUB5,331m), due to both stronger than expected cash flow from operations and lower investments.

Forecasts raised: Revenues up 3%, net income c 20%

We have incorporated FY18 results into our model and raised forecasts for FY19 and FY20, with adjusted revenues up 3% and net income up c 20%. We also expect net debt to be significantly lower than before, mainly because of lower-than-expected capex in FY18.

Exhibit 3: Forecasts changes

RUBm

2018

2019e

2020e

Adj. revenue

New

31,288

34,352

37,833

Old

30,249

33,313

36,822

% change

3%

3%

3%

EBIT

New

10,415

12,925

14,526

Old

10,122

11,046

12,612

% change

3%

17%

15%

Net income

New

9,509

9,177

10,314

Old

8,242

7,841

8,228

% change

15%

17%

25%

Net debt

New

1,779

7,002

15,686

Old

5,331

17,564

27,566

% change

-67%

-60%

-43%

Source: Company data, Edison Investment Research

Our FY19 and FY20 estimates are based on an adjusted revenue CAGR (FY18–20) of 10% (which compares to an FY16–18 CAGR of 19%), reflecting continued volume growth translated into higher revenues for Integrated Freight Forwarding and Logistics Services. On the one hand, growth is driven by a supportive outlook for the Russian economy, with the World Bank estimating GDP expansion of 1.5% for 2019 and 1.8% for 2020. On the other hand, a structural trend towards containerisation should continue to represent a tailwind for TransContainer. According to company estimates, 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%).

Higher revenues combined with a forecast small operating profit margin expansion (from 36.9% in FY18 to 38.4% in FY20e) are expected to drive a 12% operating profit CAGR, on our estimates. 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). Management has previously said that capex will increase over the next years, mainly invested in new flatcars, to support an improved trading outlook (spending on flatcars stopped during the last recession). The company guides for RUB13.3bn capex in FY19, broadly double the level of FY18.

Valuation: Raised to RUB6,100/share

We have raised our valuation by 13% to RUB6,100/share, from RUB5,400/share, reflecting our higher profit forecasts and lower net debt. Hence, even following the recent pick-up in the share price, we see room for further upside. Our valuation is based on a DCF methodology, with unchanged assumptions of a WACC of 10.4% and a terminal growth rate of 1% (we obtain an EV of RUB91.9bn and an equity value of RUB84.9bn). As a sensitivity, a WACC that is higher/lower by two percentage points reduces/increases the valuation by RUB1,300/2,100 per share. Our valuation implies 5.7x FY19e EV/EBITDA and 9.3x FY19e P/E.

As shown in Exhibit 4, TransContainer is trading at a substantial discount to international peers, both in emerging markets and developed markets (albeit at a premium to Russian freight logistics company Globaltrans). We believe at least part of the discount to international peers reflects the limited liquidity, as well as a higher perceived country risk.

Exhibit 4: Key valuation metrics for TransContainer and international peers

Company

Country

Market cap

EV/EBITDA (x)

P/E (x)

Dividend yield (%)

(US$m)

2018

2019e

2020e

2018

2019e

2020e

2018

2019e

2020e

European Transport

Globaltrans Investment

Russia

1,761

4.01

3.85

3.95

6.32

6.21

5.77

14.51

14.85

13.79

PKP Cargo

Poland

494

3.29

3.36

3.37

7.36

6.47

6.21

0.00

2.76

6.21

VTG

Germany

1,720

9.78

8.37

8.08

28.85

18.99

16.08

1.86

2.40

2.69

Average

5.69

5.19

5.13

14.18

10.56

9.36

5.46

6.67

7.56

Emerging Market Transport

China Railway Tielong Container Logistics

China

1,567

13.48

11.32

8.76

21.36

18.65

16.08

1.19

1.20

1.50

Daqin Railway Co

China

18,643

4.95

4.63

4.47

8.58

8.47

8.42

6.66

6.31

6.28

Guangshen Railway Co

China

3,649

6.95

5.89

5.68

20.35

15.53

17.05

2.57

3.33

3.10

Average

8.46

7.28

6.30

16.76

14.22

13.85

3.47

3.61

3.63

Developed Market Transport

Canadian Pacific Railway Co

Canada

28,677

13.65

11.99

10.85

18.83

16.44

14.67

0.92

1.04

1.14

Kansas City Southern

US

11,556

11.00

9.86

9.09

19.18

17.00

14.94

1.26

1.32

1.39

Union Pacific Corp

US

120,598

13.23

12.41

11.71

21.09

18.40

16.22

1.83

2.12

2.33

Norfolk Southern Corp

US

48,086

11.63

10.98

10.16

18.91

17.19

15.04

1.69

1.88

2.03

Canadian National Railway Co

Canada

64,069

14.61

12.67

11.87

21.28

18.74

17.00

1.55

1.80

1.94

Genesee & Wyoming

US

4,873

10.72

9.57

8.58

22.28

19.44

17.07

0.00

0.00

0.00

CSX Corp

US

60,332

12.12

11.49

10.95

19.21

17.40

15.55

1.19

1.31

1.44

Aurizon Holdings

Australia

6,366

8.18

9.34

8.78

16.36

20.68

18.34

6.16

4.85

5.48

Average

11.89

11.04

19.64

18.16

16.10

1.83

1.79

1.97

Overall average

9.83

8.98

17.85

15.69

14.18

2.96

3.23

3.52

TransContainer

Russia

1,114

5.15

4.62

4.13

8.04

7.93

7.06

6.53

6.30

7.08

Source: Refinitiv, Edison Investment Research

Key risks to our valuation are a stronger or weaker economic environment, higher or weaker than expected earnings margins and higher or lower than expected structural growth of the industry.

Exhibit 5: Financial summary

December year end (RUBm)

2017

2018

2019e

2020e

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Adjusted revenues

27,782

31,288

34,352

37,833

EBITDA (company definition)

10,252

13,342

16,138

18,065

EBITDA

10,163

13,342

16,138

18,065

Operating Profit (before amort. and except.)

7,495

10,415

12,925

14,526

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

13,126

14,739

Net Interest

(333)

(420)

(1,509)

(1,683)

Profit Before Tax (norm)

8,147

10,263

11,617

13,056

Profit Before Tax (FRS 3)

8,213

11,978

11,617

13,056

Tax

(1,638)

(2,469)

(2,439)

(2,742)

Profit After Tax (norm)

6,228

7,794

9,177

10,314

Profit After Tax (FRS 3)

6,575

9,509

9,177

10,314

Average Number of Shares Outstanding (m)

13.9

13.9

13.9

13.9

EPS - normalised (RUB)

448.2

560.9

660.5

742.3

EPS - normalised and fully diluted (RUB)

448.2

560.9

660.5

742.3

EPS - (IFRS) (RUB)

473.2

684.4

660.5

742.3

Dividend per share (RUB)

293.0

342.2

330.2

371.1

EBITDA Margin (%) (company definition)

36.9

42.6

47.0

47.8

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

27.0

33.3

37.6

38.4

BALANCE SHEET

Fixed Assets

45,983

52,139

62,666

78,043

Intangible Assets

384

269

269

269

Tangible Assets

42,196

48,500

59,027

74,404

Investments

3,403

3,370

3,370

3,370

Current Assets

9,756

15,973

16,604

17,321

Stocks

287

222

244

268

Debtors

1,323

1,744

1,915

2,109

Cash

4,171

9,527

9,527

9,527

Other

3,975

4,480

4,919

5,417

Current Liabilities

(7,493)

(8,246)

(8,341)

(8,450)

Creditors

(6,068)

(7,920)

(8,015)

(8,124)

Short term borrowings

(457)

(931)

(931)

(931)

Long Term Liabilities

(7,879)

(13,805)

(19,028)

(27,712)

Long term borrowings

(4,987)

(10,980)

(16,203)

(24,887)

Other long term liabilities

(2,892)

(2,825)

(2,825)

(2,825)

Net Assets

40,367

46,061

51,901

59,203

CASH FLOW

Operating Cash Flow

10,670

14,267

16,942

18,951

Net Interest

(440)

(268)

(1,509)

(1,683)

Tax

(1,483)

(2,144)

(2,439)

(2,742)

Capex

(6,974)

(6,166)

(13,741)

(18,916)

Acquisitions/disposals

33

(1,868)

0

0

Financing

92

372

279

296

Dividends

(650)

(4,072)

(4,755)

(4,589)

Net Cash Flow

1,248

121

(5,223)

(8,684)

Opening net debt/(cash)

3,534

2,241

1,779

7,002

HP finance leases initiated

0

0

0

0

Other

45

341

0

0

Closing net debt/(cash)

2,241

1,779

7,002

15,686

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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New Zealand

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. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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.

United States

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.

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United Kingdom

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United States of America

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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

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