Growth accelerating in Q3, forecasts raised

TransContainer 6 December 2018 Update
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TransContainer

Growth accelerating in Q3, forecasts raised

Q3 results update

General industrials

6 December 2018

Price

RUB4,530

Market cap

RUB63bn

Net debt (RUBbn) at end Q318

2.04

Shares in issue

13.9m

Free float

0.66%

Code

TRCN

Primary exchange

MICEX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

1.8

3.5

4.1

Rel (local)

(1.0)

(1.7)

(10.0)

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 event

FY results publication

March 2019 (TBC)

Analyst

Dario Carradori

+44 (0)20 3077 5700

TransContainer is a research client of Edison Investment Research Limited

TransContainer delivered a significant step-up in revenue and EBITDA growth in Q3, supported by industry growth, higher efficiencies and a more favourable business mix. We have increased our FY18 forecasts to reflect the strong Q3 results (revenue, EBITDA and net income forecasts rise by 4%, 15% and 26% respectively) and made more modest increases to our FY19 and FY20 forecasts. Our DCF valuation increases by 4% to RUB5,400/share, implying 20% potential upside to the current share price.

Year end

Revenue (RUBm)

PBT*
(RUBm)

EPS*
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/16

21,988

4,302

247.5

46.8

18.3

1.0

12/17

27,782

8,195

471.6

293.0

9.6

6.5

12/18e

30,249

10,033

577.6

296.6

7.8

6.5

12/19e

33,313

10,318

564.3

282.2

8.0

6.2

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

Q3 results show strong acceleration in growth

Revenue and profit growth rates accelerated over the course of Q318 with TransContainer reporting adjusted revenue growth of 13% y-o-y vs H1 growth of 8% y-o-y. Economies of scale, a more favourable revenue mix and efficiencies have also contributed to a large pick-up in margins, with Q3 EBITDA margin of 64% vs 41% in H1. The proportion of group revenues from the higher value-added Integrated Freight Forwarding and Logistics Services increased materially, to 82.0% from 74.5% in the same period of FY17, although the transition is stabilising in Q3 (proportion of integrated logistics revenues was similar to the level seen in Q317).

Forecasts raised, industry outlook supportive

We have raised our forecasts following the better-than-expected Q3 results. We have increased our FY18 revenue, EBITDA and net income forecasts by 4%, 15% and 26% respectively, while we have made more modest increases to our FY19 and FY20 forecasts. Containerisation is a structural trend for the Russian market and should support revenue and profit growth for TransContainer, in our view. Currently, only 6.2% of Russia’s potentially containerisable rail cargo is actually 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%). In terms of economic outlook, while GDP growth forecasts for Russia remain supportive (World Bank estimates +1.8% for both 2019e/20e), we believe the recent tension with Ukraine represents the largest risk to economic growth in the country.

Valuation increased to RUB5,400/share

On respective FY18/19e P/E multiples of 7.8x/8.0x and EV/EBITDA multiples of 4.8x/4.5x, TransContainer is trading at a substantial discount to international peers, both in emerging markets and developed markets. We believe at least part of the discount reflects the limited liquidity as well as a higher perceived country risk. We have raised our DCF valuation by 4% to RUB5,400/share, from RUB5,200/share, reflecting the higher forecasts.

9M results show revenue/earnings growth acceleration

TransContainer presented its IFRS Q318 results on 28 November 2018, which showed revenue and profit growth accelerated over the course of the quarter. Q3 adjusted revenue growth was 13% y-o-y vs H1 growth of 8% y-o-y. Economies of scale, a more favourable revenue mix and efficiencies have also contributed to a large pick-up in margins, with a Q318 EBITDA margin of 64% vs 41% in H118. We detail the key takeaways below:

9M adjusted revenues of RUB22.4bn, +9.7% y-o-y benefitted from a 5% pick-up in overall transportation volumes and a shift in demand towards more value-added Integrated Freight Forwarding and Logistics Services (revenues up 20.7% y-o-y), away from basic point-to-point transportation. As of 9M18, the proportion of group revenues from Integrated Freight Forwarding and Logistics Services increased materially, to 82.0% vs 74.5% in the same period of FY17. However, looking at quarterly development, the trend softened in Q318 with the proportion of integrated logistics revenue at a similar level to Q317 (Exhibit 1)

Exhibit 1: Integrated logistics revenues as a % of group revenues

Source: Company data

9M EBITDA increased by 25.4% y-o-y to RUB11.21bn. The 9M EBITDA margin increased to 50.0% from 43.7% at 9M17. We believe this expansion was driven by economies of scale (overall increase in transportation volumes of 5% y-o-y), a shift to higher-margin integrated services activities (representing 82% of group revenues from 74.5%) and efficiencies, including an increase in the share of 'profit-making' runs (81.3% in 9M18 vs 80.3% in 9M17), as well as 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 (Exhibit 2). Labour productivity has also improved with the number of personnel down 0.5% y-o-y. Overall adjusted operating expenses increased by 2.3%, well below adjusted revenue growth of 9.7%.

Exhibit 2: Efficiencies contributed to margin expansion

Source: Company data

9M net income of RUB6.64bn, +28% y-o-y was driven by EBITDA growth, in part offset by moderate growth in financial expenses and D&A.

9M net debt remained low at RUB2.04bn (vs RUB2.25bn at H1), implying 0.14x net debt/EBITDA.

Outlook and forecasts changes

Containerisation should continue to support growth

Containerisation is a structural trend for the Russian market and should support revenue and profit growth for TransContainer, in our view. Currently, only 6.2% 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%). There are a number of factors that are boosting containerisation in Russia: 1) the switch from road transport to rail containers, especially over long distances; 2) growing international trade with countries where containerisation is more popular; 3) technological progress, eg handling technologies; 4) as old stock is upgraded, boxcars are being replaced with containers; and 5) the pricing policies of Russian Railways are making the switch to containers more attractive for certain products, such as aluminium and bulk liquids, and for some routes, such as Trans-Siberian.

In terms of economic backdrop, the outlook for the Russian economy is relatively positive. The World Bank expects Russia GDP to grow 1.8% in both 2019 and 2020 (vs +1.5% in 2018). However, recent renewed tension with the Ukraine poses one of the biggest risks to these forecasts, especially if the possibility of further sanctions re-emerges.

Forecasts: We raise our FY18/20 forecasts

Following Q3 results that were above our expectations, we have increased our forecasts for revenues and profits. For FY18e, we have incorporated the strong Q3 results and raised our Q4 expectations. Overall, our FY18 revenue, EBITDA, net income forecasts rise by 4%, 15% and 26% respectively. In addition, we have made more moderate increases to our forecasts for FY19 and FY20 (revenues up 1%, EBITDA up 4%, net income up 11%/12%), mainly to reflect higher margins than we expected previously following the very high levels achieved in Q3. Our forecasts continue to conservatively incorporate a slight reduction in margins going forward (EBITDA margins of 46% in FY19/20 vs the 50% achieved in 9M18).

Exhibit 3: Changes to forecasts

Year end December (RUBm)

2017

2018e

2019e

2020e

Adj. revenue

NEW

27,782

30,249

33,313

36,822

OLD

27,782

29,031

32,890

36,458

% change

0%

4%

1%

1%

EBITDA

NEW

11,474

14,286

15,171

17,118

OLD

11,474

12,375

14,527

16,478

% change

0%

15%

4%

4%

Operating profit (company definition)

NEW

7,760

10,122

11,046

12,612

OLD

7,760

8,965

10,781

12,379

% change

0%

13%

2%

2%

Net Income (company definition)

NEW

6,534

8,242

7,841

8,228

OLD

6,534

6,534

7,019

7,439

% change

0%

26%

12%

11%

Net debt

NEW

2,241

5,331

17,564

27,566

OLD

2,241

8,179

19,989

30,025

% change

0%

(35%)

(12%)

(8%)

DPS

NEW

293

297

282

296

OLD

293

235

253

268

% change

0%

26%

12%

11%

Source: Company data, Edison Investment Research

We now forecast adjusted revenue CAGR of 10% (2018-20e) and a slightly lower EBITDA CAGR of 9%, reflecting a normalisation in margins. At the bottom line, this growth is offset by an increase in financial expenses (we expect a material increase in net debt reflecting significant new investments) and a slightly higher tax rate. Management has previously said that capex will increase over the next three years, mainly invested in new flatcars, to support an improved trading outlook (spending on flatcars stopped during the last recession).

Exhibit 4: Revenue breakdown

Activity (RUBm)

FY16

FY17

FY18e

FY19e

FY20e

Integrated freight forwarding and logistics services

71,274

81,109

92,465

Agency fees

1,225

1,298

1,363

Other

2,822

2,737

2,600

Total (IFRS definition)

51,483

65,567

75,320

85,144

96,428

Growth

27%

15%

13%

13%

Third-party charges related to principal activities

(29,495)

(37,785)

(45,071)

(51,831)

(59,606)

Total (company definition)

21,988

27,782

30,249

33,313

36,822

Growth levels

Integrated freight forwarding and logistics services

25%

14%

14%

Agency fees

N/A

6%

5%

Other

(57%)

(3%)

(5%)

Total (IFRS definition)

27%

15%

13%

13%

Third-party charges related to principal activities

28%

19%

15%

15%

Total (company definition)

26%

9%

10%

11%

Source: Company data, Edison Investment Research

Valuation increased to RUB5,400/share

Trading at 7.8x/8.0x P/E and 4.8x/4.5x EV/EBITDA for 2018e/19e, TransContainer is at a large discount to international peers, both in emerging markets and developed markets. We believe at least part of the discount reflects the limited liquidity of the stock as well as the higher perceived country risk, which results in Russian equities usually trading at a discount to global equities.

We have raised our valuation by 4% to RUB5,400/share, from RUB5,200/share, reflecting our higher forecasts. The 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 RUB80.4bn and an equity value of RUB75.0bn). As sensitivity, a WACC that is higher/lower by two percentage points reduces/increases the valuation to RUB4,100/7,500 per share. Key risks to our valuation are a stronger/weaker economic environment, higher/weaker than expected earnings margins and higher/lower than expected structural growth of the industry.

Exhibit 5: Financial summary

December year end (RUBm)

2016

2017

2018e

2019e

2020e

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

21,988

27,782

30,249

33,313

36,822

EBITDA (company definition)

7,099

11,474

14,286

15,171

17,118

EBITDA

7,046

11,196

13,589

14,871

16,818

Operating Profit (before amort. and except.)

3,849

7,735

9,848

11,046

12,612

Intangible Amortisation

0

0

0

0

0

Exceptionals

(223)

25

274

0

0

Other

669

704

659

494

524

Operating Profit

4,295

8,464

10,781

11,540

13,136

Net Interest

(216)

(333)

(474)

(1,222)

(2,310)

Profit Before Tax (norm)

4,302

8,195

10,033

10,318

10,826

Profit Before Tax (FRS 3)

4,079

8,172

10,307

10,318

10,826

Tax

(835)

(1,638)

(2,219)

(2,476)

(2,598)

Profit After Tax (norm)

2,798

5,764

7,155

7,347

7,704

Profit After Tax (FRS 3)

3,244

6,534

8,088

7,841

8,228

Average Number of Shares Outstanding (m)

13.8

13.9

13.9

13.9

13.9

EPS - normalised (RUB)

247.5

471.6

577.6

564.3

592.2

EPS - normalised and fully diluted (RUB)

247.5

471.6

577.6

564.3

592.2

EPS - (IFRS) (RUB)

234.7

470.2

582.1

564.3

592.2

Dividend per share (RUB)

46.8

293.0

296.6

282.2

296.1

EBITDA Margin (%) (company definition)

32.3

41.3

47.2

45.5

46.5

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

17.5

27.8

32.6

33.2

34.3

BALANCE SHEET

Fixed Assets

40,822

45,983

55,058

71,381

86,110

Intangible Assets

290

384

384

384

384

Tangible Assets

37,847

42,196

51,271

67,594

82,323

Investments

2,685

3,403

3,403

3,403

3,403

Current Assets

11,006

9,756

10,264

10,880

11,585

Stocks

209

287

312

344

380

Debtors

1,605

1,323

1,440

1,586

1,753

Cash

5,603

4,171

4,183

4,183

4,183

Other

3,589

3,975

4,328

4,766

5,268

Current Liabilities

(8,372)

(7,493)

(7,898)

(8,401)

(8,977)

Creditors

(5,592)

(6,068)

(6,473)

(6,976)

(7,552)

Short term borrowings

(399)

(457)

(457)

(457)

(457)

Long Term Liabilities

(8,947)

(7,879)

(10,981)

(23,214)

(33,216)

Long term borrowings

(6,357)

(4,987)

(8,089)

(20,322)

(30,324)

Other long term liabilities

(2,590)

(2,892)

(2,892)

(2,892)

(2,892)

Net Assets

34,509

40,367

46,443

50,645

55,501

CASH FLOW

Operating Cash Flow

7,421

10,670

13,433

14,994

16,976

Net Interest

(165)

(440)

(474)

(1,222)

(2,310)

Tax

(781)

(1,483)

(2,219)

(2,476)

(2,598)

Capex

(2,277)

(6,974)

(12,100)

(19,655)

(18,411)

Acquisitions/disposals

28

33

0

0

0

Financing

1,024

92

2,329

247

262

Dividends

(4,830)

(650)

(4,071)

(4,121)

(3,921)

Net Cash Flow

420

1,248

(3,102)

(12,233)

(10,002)

Opening net debt/(cash)

3,663

3,534

2,241

5,331

17,564

HP finance leases initiated

0

0

0

0

0

Other

(291)

45

12

0

(0)

Closing net debt/(cash)

3,534

2,241

5,331

17,564

27,566

Source: Company accounts, 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 Edison analyst 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 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “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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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.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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