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.
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TransContainer |
Mandatory tender offer to be launched |
9M19 results |
General industrials |
10 December 2019 |
Share price performance
Business description
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TransContainer is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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.
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:
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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%).
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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
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