Mandatory tender offer to be launched

TransContainer 10 December 2019 Update
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TransContainer

Mandatory tender offer to be launched

9M19 results

General industrials

10 December 2019

Price

RUB8,270

Market cap

RUB115bn

Net debt (RUBbn) at 30 September 2019

7.2

Shares in issue

13.9m

Free float

0.4%

Code

TRCN

Primary exchange

MICEX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

(3.5)

(8.1)

84.6

Rel (local)

(2.6)

(13.1)

52.4

52-week high/low

RUB9,025

RUB4,330

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

FY19 IFRS results

March 2020

Analyst

Dario Carradori

+44 (0)20 3077 5700

TransContainer is a research client of Edison Investment Research Limited

Following the sale of a majority stake in TransContainer to Delo Group as a result of the planned auction (at c RUB8,680/share), there is a legal requirement for Delo Group to launch a tender offer to minority shareholders. TransContainer’s Q3 results showed strong earnings growth, albeit at lower rates than previous quarters. We have slightly reduced our DCF-based valuation to RUB9,100/share.

Year end

Revenue (RUBm)

PBT*
(RUBm)

EPS*
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/17

27,782

8,147

448

293

18.5

3.5

12/18

31,288

10,263

561

480

14.7

5.8

12/19e

39,090

16,110

919

452

9.0

5.5

12/20e

46,560

20,620

1,172

586

7.1

7.1

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

Mandatory tender offer for minority shares

State-owned Russian Railways held a tender auction to sell a 50% stake plus two shares in TransContainer on 27 November in the biggest Russian privatisation since 2016. The stake was sold to Delo Group for RUB60.3bn, at a 4% premium to the share price at the time. In line with legal requirements, Delo Group will have to launch a tender offer on the remaining shares, the price of which will be the higher of either the average share price over the six months prior to the sale or the c RUB8,680/share purchase price for the majority stake during the tender process. At this stage, it is unclear whether minority shareholders will sell their stakes and whether the new owner will want to keep the group listed post takeover.

Strong growth in Q3, albeit growth rate moderated

TransContainer reported strong growth in Q3 (revenues up 10% y-o-y), although the growth rate moderated vs Q1 (+20% y-o-y) and Q2 (+15% y-o-y). Growth was driven by both volumes and price growth. TransContainer benefited from strong cyclical growth in industries such as timber and auto and components, which represent a large portion of the volumes transported, albeit a limited share of Russian GDP. Adjusted EBITDA of RUB15.4bn grew 57.6% y-o-y, while net income was up +57.8% y-o-y to RUB10.49bn. We forecast that strong growth will continue, albeit at lower rates, reflecting our expectations of a stabilisation in transport prices but continued volume growth. We slightly reduce our forecasts (FY19–20 adjusted revenues down 3%).

Valuation supported by mandatory tender offer

In the short term, the mandatory tender offer, which is likely to be at the same level as the auction price (c RUB8,680/share), should provide strong support for the share price. In the longer term, if the company can sustain its strong growth, it is likely to drive further share price appreciation, in our view. We have slightly reduced our valuation to RUB9,100/share (from RUB9,460/share) reflecting the lower forecasts. We continue to believe that if the reorganisation of the shareholder structure results in an increased free float, there would be scope for a re-rating, considering the current limited liquidity of the stock.

Mandatory tender offer for minority shares

As previously announced, state-owned Russian Railways held a tender auction to sell a 50% stake plus two shares in TransContainer on 27 November in the biggest Russian privatisation since 2016. The stake was sold to Delo Group, controlled by Sergey Shishkarev, for RUB60.3bn, at a 4% premium to the share price at the time. Delo Group owns 100% of DeloPorts (a grain and container terminal) and 30.75% of Global Ports, Russia's largest operator of sea container terminals.

In line with legal requirements, Delo Group must now launch a tender offer on the remaining shares, the price of which will be the higher of either the average share price over the six months prior to the sale or the c RUB8,680/share purchase price for the majority stake during the tender process.

At this stage, it is unclear whether minority shareholders (including Yenisei Capital – controlled by Roman Abramovich and Alexander Abramov – which owns a 24.74% stake in TransContainer and unsuccessfully bid for the majority stake) will sell their stakes and whether the new owner wants to keep the group listed post the takeover. We continue to believe that if the process results in an increased free float, there would be scope for a re-rating, considering the limited liquidity of the stock.

TransContainer continues to grow strongly

TransContainer reported 9M IFRS results, with strong revenue and earnings growth, although the growth rate moderated in Q3, as expected. The key highlights were:

Revenues of RUB63.8bn, +14.5% y-o-y. Although growth was still strong in Q3 (revenues up 10% y-o-y), the growth rate slowed down vs Q1 (+20% y-o-y) and Q2 (+15% y-o-y). Adjusted revenues (revenues less cost of integrated freight forwarding and logistics services) of RUB28.6bn were +27.7% y-o-y.
The growth was driven by both volumes and price. Russian rail container transportation volumes for the entire industry grew 13% in the first 10 months of 2019, according to TransContainer. Its ability to attract orders outside Russia is sustaining its growth, while domestic economic growth is lacklustre. 9M growth was strengthened by a strong pick-up in orders from South Korea and China. While Russia represents 79% of 9M19 total sales, it accounts for only 35% of the year-on-year sales increase, with the rest of the growth driven mostly by China (growing almost 3x y-o-y) and South Korea (+15% y-o-y).
Both the market and TransContainer benefited from strong cyclical growth in industries such as timber (+34% y-o-y transported volumes for TransContainer), and auto and components (+22% y-o-y), which represent a large portion of volumes transported, albeit a limited share of Russian GDP (timber volumes represent c 20% of TransContainer’s volumes, while auto and components represent c 7%).

Adjusted EBITDA of RUB15.4bn, +57.6% y-o-y implying a margin expansion with 53.7% EBITDA margin in 9M19 vs 43.5% in 9M18.

Adjusted net income of RUB10.49bn, +57.8% y-o-y, thanks to slower growth in costs than revenues (adjusted operating costs up 7.5% y-o-y).

Net debt of RUB7.2bn, up significantly vs RUB1.78bn at the end of FY18, driven by an expected large pick-up in capex (FY19 guidance of RUB18.6bn, a threefold increase y-o-y).

Growth drivers and outlook

We believe that both structural and cyclical drivers supported growth in FY19, and expect the structural trend towards containerisation to continue to support growth in future 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 the US (c 50%) and Europe (18%), according to TransContainer.

Looking at cyclical drivers, we note that Russian GDP picked up in Q3, with 1.7% y-o-y growth, a significant step-up vs only +0.9% y-o-y in Q2 and +0.5% y-o-y in Q1. The pick-up comes after the Russian central bank cut interest rates several times over the course of 2019 (most recently in September and again in October to the current 6.5%). Most forecasts expect a rebound in economic growth in 2020, thanks to increased government spending as Russia targets an extra RUB25.7tn (c US$390bn) by 2024 to boost infrastructure, healthcare and education. The World Bank forecasts +1.2% GDP growth in 2019, +1.6% in 2020 and +1.8% in 2021, with the growth driven by less restrictive monetary policy and increased spending on national projects.

Although we believe domestic economic growth is a key driver of growth for TransContainer, we also view the company’s ability to grow internationally as key to support its development going forward. In our view, increased sales to other Asian customers (mostly China) strengthen the resilience of its business model and reduce risks for the company.

We have increased our forecast several times over the last 12 months, reflecting quarterly results consistently beating our expectations. We now instead slightly reduce our estimates (FY19–20 adjusted revenues down 3%) following 9M19 results. We forecast growth to continue strongly, albeit at lower rates than in previous quarters, reflecting our expectations for a stabilisation in prices but continued volume growth. Overall, our forecasts reflect some moderation in adjusted revenue growth rates vs previous quarters (H1: +32% y-o-y, Q3: +20% y-o-y). We project 18% adjusted revenue growth in Q419 and a 19% increase again in FY20.

In our view, a key risk to TransContainer’s growth outlook is the level of transport volumes for the timber industry, which represented c 20% in 9M19. 80% of Russian timber supply to China is illegally sourced, according to David Gehl, Eurasia Program Coordinator at the Washington DC-based Environmental Investigation Agency (source: Time Magazine, 27 November 2019). The Russian government has previously threatened to ban timber exports to China unless it co-operates in mitigating the impact of illegal timber logging in Russia (source: Reuters, 15 August 2019). In addition, the US-China trade dispute has led to the introduction of tariffs on timber imported into China from the US, leading to a sudden drop of American exports to the country and boosting timber exports from Russia. According to industry figures (Forest2Market), US hardwood exports to China are on track to reduce by 22% y-o-y in 2019. The resolution of the US-China trade dispute may have consequences for Russian rail transport volumes and, in turn, this may have consequences for TransContainer. We currently assume that TransContainer’s revenue growth cools down after a period of strong growth, driven by slower growth in volume and prices, but we do not incorporate a significant slowdown in our forecasts.

Exhibit 1: Forecasts changes

2018

2019e

2020e

Adj. revenue

New

31,288

39,090

46,560

Old

40,229

47,858

% change

-3%

-3%

EBIT

New

10,415

16,640

21,824

Old

17,779

23,122

% change

-6%

-6%

Net Income

New

9,509

12,556

16,289

Old

13,456

17,396

% change

-7%

-6%

Net debt

New

1,779

8,694

11,738

Old

7,661

10,415

% change

13%

13%

Source: Company data, Edison Investment Research

Valuation of RUB9,100/share

In the short term, the mandatory tender offer, which is likely to be at the same level as the auction price (RUB8,680/share), should provide strong support for the share price. In the longer term, if the company can sustain its strong growth, it is likely to drive further share price appreciation, in our view, assuming there is no material adverse change in corporate governance.

Our valuation methodology (DCF) and assumptions are unchanged, with a WACC of 10.4% and terminal growth rate of 1%. We have slightly reduced our valuation to RUB9,100/share (from RUB9,460 per share), reflecting the lower forecasts. We calculate an EV of RUB135.1bn and an equity value of RUB126.4bn. Our valuation implies 6.7x FY19e EV/EBITDA and 9.9x 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 higher or lower profit margins globally.

Exhibit 2: Financial summary

RUBm

2017

2018

2019e

2020e

December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

27,782

31,288

39,090

46,560

EBITDA

10,252

13,342

20,297

26,179

EBIT

 

 

7,495

10,415

16,640

21,824

Operating Profit (before amort. and except.)

 

 

7,495

10,415

16,640

21,824

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

16,724

22,142

Net Interest

(333)

(420)

(831)

(1,522)

Profit Before Tax (norm)

 

 

8,147

10,263

16,110

20,620

Profit Before Tax (FRS 3)

 

 

8,213

11,978

15,894

20,620

Tax

(1,638)

(2,469)

(3,338)

(4,330)

Profit After Tax (norm)

6,228

7,794

12,772

16,289

Profit After Tax (FRS 3)

6,575

9,509

12,556

16,289

Average Number of Shares Outstanding (m)

13.9

13.895

13.9

13.9

EPS - normalised (RUB)

 

 

448.2

560.9

919.2

1,172.3

EPS - normalised fully diluted (RUB)

 

 

448.2

560.9

919.2

1,172.3

EPS - (IFRS) (RUB)

 

 

473.2

684.4

903.7

1,172.3

Dividend per share (RUB)

293.0

480.4

451.8

586.2

EBITDA Margin (%) (company definition)

36.9

42.6

51.9

56.2

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

27.0

33.3

42.6

46.9

BALANCE SHEET

Fixed Assets

 

 

45,983

52,139

66,182

80,451

Intangible Assets

384

269

269

269

Tangible Assets

42,196

48,500

62,543

76,812

Investments

3,403

3,370

3,370

3,370

Current Assets

 

 

9,756

15,973

17,580

19,119

Stocks

287

222

277

330

Debtors

1,323

1,744

2,179

2,595

Cash

4,171

9,527

9,527

9,527

Other

3,975

4,480

5,597

6,667

Current Liabilities

 

 

(7,493)

(8,246)

(8,489)

(8,722)

Creditors

(6,068)

(7,920)

(8,163)

(8,396)

Short term borrowings

(457)

(931)

(931)

(931)

Long Term Liabilities

 

 

(7,879)

(13,805)

(20,720)

(23,764)

Long term borrowings

(4,987)

(10,980)

(17,895)

(20,939)

Other long-term liabilities

(2,892)

(2,825)

(2,825)

(2,825)

Net Assets

 

 

40,367

46,061

54,554

67,084

CASH FLOW

Operating Cash Flow

 

 

10,670

14,267

21,212

27,269

Net Interest

(440)

(268)

(831)

(1,522)

Tax

(1,483)

(2,144)

(3,338)

(4,330)

Capex

(6,974)

(6,166)

(17,700)

(18,624)

Acquisitions/disposals

33

(1,868)

0

0

Financing

92

372

416

441

Dividends

(650)

(4,072)

(6,675)

(6,278)

Net Cash Flow

1,248

121

(6,915)

(3,044)

Opening net debt/(cash)

 

 

3,534

2,241

1,779

8,694

HP finance leases initiated

0

0

0

0

Other

45

341

0

0

Closing net debt/(cash)

 

 

2,241

1,779

8,694

11,738

Source: Company data, Edison Investment Research


General disclaimer and copyright

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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General disclaimer and copyright

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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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.

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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

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London +44 (0)20 3077 5700

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

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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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