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.
Written by
TransContainer |
Growth accelerating in Q3, forecasts raised |
Q3 results update |
General industrials |
6 December 2018 |
Share price performance
Business description
Next event
Analyst
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* |
EPS* |
DPS |
P/E |
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
e-Therapeutics (ETX) has announced an update on its collaboration with C4X Discovery (C4XD) on novel interventions in Parkinson’s disease (PD). The PD collaboration started in May 2018 and combines the network-driven drug discovery (NDD) platform at ETX with the genetic information from C4XD’s platform. This has already resulted in a number of avenues for novel drug target generation in PD.