TransContainer
Written by
TransContainer |
Q2 volume recovery boosts earnings story |
H116 results |
General industrials |
8 September 2016 |
Share price performance
Business description
Next event
Analyst
TransContainer is a research client of Edison Investment Research Limited |
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TransContainer’s (TRC) H116 results showed the company is benefiting from improving market conditions bolstered by active cost management. Russian rail-freight volumes increased by 6.1% in H116; Q2 volumes in particular accelerated significantly. This rebound, in contrast to a sluggish overall economic performance in Russia, was driven by increasing levels of ‘containerisation’ in the country and gives us confidence in our FY16 earnings forecasts for TRC. The 360bp improvement in EBITDA margins versus H115 is a further reason to be positive as evidence mounts that TRC is moving well beyond its FY15 earnings trough.
Year |
Revenue (RUBm) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/14 |
20,538 |
3,751 |
286 |
71 |
12.9 |
1.9 |
12/15 |
20,311 |
3,530 |
139 |
52 |
26.6 |
1.4 |
12/16e |
21,849 |
4,582 |
264 |
66 |
14.0 |
1.8 |
12/17e |
23,664 |
5,669 |
327 |
82 |
11.3 |
2.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Transportation volumes recovering
Following a couple of years of commodity-price and economic sanctions-led declines, rail-freight transportation volumes in Russia are showing strong signs of recovery. Q216 volumes in Russia increased by 13.2%, largely due to a 20.7% increase in domestic transportation, while TRC’s volumes increased by 12.0% in the period.
Profitability recovery underway with upside potential
In H116, TransContainer’s adjusted EBITDA margin recovered to 32.1% vs 28.4% in H115 as revenues improved and management’s focus on costs began to deliver. EBITDA margins in Q216 were 35.2%, showing an upwards trajectory. H215 margins were 35.7% illustrating that TRC’s margins are typically H2 weighted – a trend confirmed by management on the H116 conference call. We remain comfortable with our unchanged FY16 adjusted EBITDA margin (TRC definition) forecast of 34.8%.
Valuation: Optically attractive, country risk weighs
Trading on an FY17e EV/EBITDA multiple of 6.9x vs its international peers on 8.1x, TRC continues to look attractive. High cash flow generation is an important part of the equity proposition and price to operating cash flow (FY16 Edison estimate) is 6.6x. However, for now we maintain our assumed WACC of 13.1%, which while high is justified and therefore penalises our fair value. Our unchanged fair value remains RUB3,400 per share and, while we continue to believe in the attractive earnings proposition, we regard our prudent valuation approach to be appropriate.
Improving market conditions and profitability
Momentum returns to Russian rail-freight market…
Overall, the Russian rail container market saw volumes increase by 6.1% in H116 vs H115. The market continues to display strong signs of improvement with volumes growing by 13.2% in Q216. More striking is the rapid acceleration in volume recovery in the second quarter. TRC transported 12% more freight by volume in Q216 vs Q215. Of particular note were the respective 15.2%, 15.8% and 11.9% increases in freight transported on domestic routes, export routes and import routes. Transit routes provided the only disappointment in Q216 with a 29.0% decline explained by sharp drops in auto production in Uzbekistan and Kazakhstan.
Importantly, high levels of growth appear to be continuing into H216. The market grew by 7.5% y-o-y in the first eight months of 2016 according to TRC, while July witnessed an 8% y-o-y increase. In the H116 earnings announcement and conference call, TRC management sounded upbeat on market dynamics. Therefore, there is much evidence to support the markedly improving earnings environment already incorporated into our forecasts.
…driving enhanced profitability and outlook at TransContainer
TransContainer ascribes its improving financial performance to “the market recovery along with the continuing business optimization measures.” Overall, the performance in H116 showed a strong improvement, with Q216 notably stronger than Q116. Adjusted revenue increased slightly by 0.7% H116-on-H115, whereas the equivalent figure for Q216-on-Q215 was 10.7%. Adjusted operating expenses were down 2.2% H116-on-H115, albeit with a small increase Q216-on-Q215, leading to an enhanced EBITDA margin of 35.2%. For now, we maintain our FY16 EBITDA margin forecast at 34.8% to be prudent, but will watch the market and TRC closely in case we need to update our estimates.
Exhibit 1: TransContainer H116-on-H115 financial performance
(RUBbn) |
H115 |
H116 |
H-o-H (%) |
|
Integrated freight forwarding and logistics services |
|
6,162 |
6,179 |
0.3 |
Rail-based container shipping services |
|
2,129 |
2,015 |
-5.4 |
Terminal services and agency fees |
|
987 |
1,094 |
10.8 |
Truck deliveries |
|
399 |
419 |
5.0 |
Other freight forwarding services |
|
70 |
99 |
41.4 |
Bonded warehousing services |
|
92 |
95 |
3.3 |
Other |
|
48 |
56 |
16.7 |
Total adjusted revenue |
|
9,887 |
9,957 |
0.7 |
EBITDA |
|
2,804 |
3,192 |
13.8 |
Adjusted EBITDA margin (%) |
|
28.4 |
32.1 |
|
Profit for the period |
|
1,039 |
1,412 |
35.9 |
Adjusted net profit margin (%) |
|
10.5 |
14.2 |
|
Source: TransContainer
■
Integrated freight forwarding: TRC’s adjusted revenue increased by 0.3% h-o-h. Within this, Q116 vs Q115 showed a drop, while Q216 increased by 9.5% vs Q215 due to a turnaround in transportation volumes.
■
Rail-based container transportation services: Despite a 3.2% Q216 vs Q215 increase in revenues, this division declined 5.4% h-o-h reflecting, according to TRC, “the continuing shift of customers’ preferences towards integrated logistics services.”
■
Terminal services and agency fees: Higher transportation volumes together with higher tariffs charged were behind the very high rate of revenue growth (+10.8% h-o-h) in this business.
■
Truck deliveries: The 5% h-o-h revenue growth in truck deliveries was mainly due to a 3.2% increase in transportation volumes.
■
Other freight forwarding and logistics: Revenues increased by 41.4% h-o-h to RUB99m in response to customer demand for value added services.
■
Bonded warehousing: The 3.3% h-o-h decline in revenues from RUB95m to RUB92m is small in a group context.
■
Operating expenses: Adjusted operating expenses (excluding third-party charges) decreased by 2.2% vs H115. The drop reflected declining freight and transportation, and rent expenses. While we note that Q216 vs Q215 showed a slight uptick (1.0%) in adjusted costs, primarily due to increases in materials, repair and maintenance, we remain confident in our full year adjusted operating expense forecast of RUB18,391m, an increase of 3% y-o-y. Even with this, in our view prudent, increase in costs, we forecast that TRC will be able to expand its margins by 2.7% y-o-y. TRC management continues to focus on reducing costs.
Cash flow: Operating performance finances capex and returns
A 13.8% increase in H116 vs H115 EBITDA and a much higher 59.5% increase in Q216 vs Q215 EBITDA give us confidence in our forecast FY16 EBITDA growth figure of 16.4%. Over H116, higher operating profit drove a 31.6% increase in cash flow from operations. In keeping with its policy of financing capital expenditure from internal cash flows, higher operating cash flow was used to finance the RUB594m increase in capex (330.0% H116 vs H115). With nearly RUB3bn of operating cash flow generated in H116, the capex budget of RUB3.8bn was reiterated by management during the earnings call and incorporated into our forecasts is well covered.
Strong earnings growth, albeit the WACC depresses our FV
TRC’s double-digit EBITDA growth, coupled with our FY17e EV/EBITDA estimate of 6.9x vs its global peers trading on 8.1x means that optically it offers value for investors. Furthermore, its +1year P/E multiple (Edison) is equally attractive at 11.3x vs its global peers on 17.5x. TRC’s most attractive earnings attribute is its high level of cash flow generation – currently the stock is trading on an operating FCF yield of 15% (FY17e), well above its international peers on 4.1% and this will increase on our forecasts.
TRC suffers from the high degree of country risk in Russia. Our unchanged post-tax WACC of 13.1% (risk-free rate of 4.0%, Beta 1.0, equity risk premium of 9.6%, debt premium 6.0%, tax of 21%, debt weighting of 9.3%) weighs on our equity fair value. We acknowledge the sterling job management has done in managing costs, capital structure and the economic downturn. However, the Russian economy remains sensitive to geopolitical factors and the depressed commodity price environment so we maintain our cost of capital at this stage and our fair value is unchanged at RUB3,400 per share, slightly beneath the current market price.
What next?
TRC has called an EGM on 9 September to approve its dividend payment. We also expect Q3 results sometime in late November where we expect to hear further evidence of the continued improvement in TRC’s operating environment, profitability and any further update on the proposed RUB 3,800m capex plan. Management highlighted that that this programme is “subject to market conditions” and that the budget will be invested in ISO containers and improvements in terminal infrastructure. If the market improvement continues, this budget could be increased.
Exhibit 2: Transport comparative valuation sheet
Market Cap (local m) |
Current EV/ EBITDA |
Next EV/ EBITDA |
Current P/E |
Next P/E |
FCF Yield |
Div Yield This Yr |
|||||
Moscow Exchange MICEX-RTS PJSC |
11.6x |
12.3x |
5.7% |
||||||||
|
|||||||||||
European Transport |
|
||||||||||
TransContainer PJSC |
Russia |
51,133 |
8.0x |
6.9x |
14.0x |
11.3x |
6.44% |
1.8% |
|||
Globaltrans Investment PLC |
Cyprus |
840 |
1.1x |
1.0x |
16.4x |
12.5x |
16.64% |
3.5% |
|||
PKP Cargo SA |
Poland |
1,939 |
4.7x |
3.7x |
-41.6x |
30.6x |
-4.45% |
0.0% |
|||
VTG AG |
Germany |
786 |
7.1x |
6.8x |
16.8x |
13.5x |
1.81% |
2.3% |
|||
Average |
|
4.9x |
4.3x |
1.4x |
16.9x |
5.11% |
1.89% |
||||
|
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Emerging markets transport |
|
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China Railway Tielong Container Logistics Co Ltd |
China |
9,517 |
17.5x |
18.3x |
34.1x |
31.7x |
1.38% |
0.9% |
|||
Daqin Railway Co Ltd |
China |
94,255 |
7.1x |
7.2x |
12.0x |
11.7x |
7.26% |
4.1% |
|||
Guangshen Railway Co Ltd |
China |
23,965 |
6.9x |
6.4x |
23.4x |
20.6x |
4.25% |
2.0% |
|||
Average |
|
10.5x |
10.6x |
23.2x |
21.3x |
4.30% |
2.33% |
||||
|
|||||||||||
Developed market transport |
|||||||||||
Canadian Pacific Railway Ltd |
Canada |
9,517 |
11.4x |
10.7x |
18.9x |
16.5x |
3.32% |
0.9% |
|||
Union Pacific Corp |
US |
94,255 |
10.0x |
9.3x |
19.1x |
17.0x |
3.98% |
0.0% |
|||
Norfolk Southern Corp |
US |
23,965 |
10.0x |
9.3x |
19.1x |
17.0x |
3.98% |
2.4% |
|||
Canadian National Railway Co |
Canada |
29,692 |
11.6x |
11.0x |
18.9x |
17.2x |
3.93% |
2.5% |
|||
Genesee & Wyoming Inc |
US |
3,936 |
11.6x |
11.0x |
18.9x |
17.2x |
3.93% |
1.8% |
|||
CSX Corp |
US |
27,254 |
8.2x |
7.7x |
16.5x |
15.0x |
3.15% |
0.0% |
|||
Aurizon Holdings Ltd |
Australia |
8,987 |
8.2x |
7.7x |
16.5x |
15.0x |
3.15% |
2.5% |
|||
Average |
10.1x |
9.5x |
18.3x |
16.4x |
3.63% |
1.44% |
|||||
Overall Transport Average |
8.5x |
8.1x |
14.1x |
17.5x |
4.13% |
2.21% |
|||||
Source: Bloomberg, Edison Investment Research, Priced at 8 September 2016
Exhibit 3: Financial summary
RUBm |
2014 |
2015 |
2016e |
2017e |
2018e |
2019e |
2020e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
20,538 |
20,311 |
21,849 |
23,664 |
25,211 |
26,890 |
28,710 |
EBITDA (company definition) |
|
|
7,816 |
6,526 |
7,599 |
8,771 |
9,533 |
10,294 |
11,125 |
EBITDA (Edison definition) |
|
|
6,544 |
5,744 |
6,778 |
7,826 |
8,492 |
9,149 |
9,861 |
Operating Profit (before amort. and except.) |
4,083 |
3,274 |
4,269 |
5,231 |
5,739 |
6,226 |
6,756 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
4,083 |
3,274 |
4,269 |
5,231 |
5,739 |
6,226 |
6,756 |
||
Net Interest |
(497) |
(356) |
(360) |
(303) |
(282) |
(258) |
(229) |
||
Share of assocs/JVs gains/(losses) |
165 |
612 |
673 |
741 |
815 |
896 |
986 |
||
Forex gains/(losses |
938 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
18 |
18 |
0 |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
3,751 |
3,530 |
4,582 |
5,669 |
6,272 |
6,864 |
7,514 |
Profit Before Tax (FRS 3) |
|
|
4,707 |
3,548 |
4,582 |
5,669 |
6,272 |
6,864 |
7,514 |
Tax |
(1,049) |
(717) |
(962) |
(1,190) |
(1,317) |
(1,442) |
(1,578) |
||
Profit After Tax (norm) |
2,702 |
2,813 |
3,620 |
4,478 |
4,955 |
5,423 |
5,936 |
||
Profit After Tax (FRS 3) |
3,658 |
2,831 |
3,620 |
4,478 |
4,955 |
5,423 |
5,936 |
||
Average Number of Shares Outstanding (m) |
13.7 |
13.7 |
13.7 |
13.7 |
13.7 |
13.7 |
13.7 |
||
EPS - normalised (RUB) |
|
|
286.0 |
138.7 |
264.4 |
327.0 |
361.8 |
396.0 |
433.5 |
EPS - normalised and fully diluted (RUB) |
|
286.0 |
138.7 |
264.4 |
327.0 |
361.8 |
396.0 |
433.5 |
|
EPS - (IFRS) (RUB) |
|
|
267.1 |
206.7 |
264.4 |
327.0 |
361.8 |
396.0 |
433.5 |
Dividend per share (RUB) |
71.0 |
51.7 |
66.1 |
81.8 |
90.5 |
99.0 |
108.4 |
||
EBITDA Margin (%) |
31.9 |
28.3 |
31.0 |
33.1 |
33.7 |
34.0 |
34.3 |
||
Operating Margin (before GW and except.) (%) |
19.9 |
16.1 |
19.5 |
22.1 |
22.8 |
23.2 |
23.5 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
42,012 |
41,739 |
43,030 |
45,404 |
47,945 |
50,669 |
53,594 |
Intangible Assets |
210 |
246 |
246 |
246 |
246 |
246 |
246 |
||
Tangible Assets |
37,900 |
37,827 |
39,118 |
41,492 |
44,033 |
46,757 |
49,682 |
||
Investments |
3,343 |
3,023 |
3,023 |
3,023 |
3,023 |
3,023 |
3,023 |
||
Other |
559 |
643 |
643 |
643 |
643 |
643 |
643 |
||
Current Assets |
|
|
6,965 |
7,435 |
8,498 |
9,115 |
9,789 |
10,580 |
11,493 |
Stocks |
340 |
315 |
339 |
367 |
391 |
417 |
445 |
||
Debtors |
1,542 |
1,392 |
1,497 |
1,622 |
1,728 |
1,843 |
1,968 |
||
Cash |
1,904 |
2,110 |
2,925 |
3,225 |
3,568 |
3,982 |
4,491 |
||
Other |
3,179 |
3,618 |
3,737 |
3,902 |
4,102 |
4,337 |
4,590 |
||
Current Liabilities |
|
|
(5,581) |
(6,747) |
(6,862) |
(7,021) |
(7,215) |
(7,441) |
(7,685) |
Creditors |
(3,084) |
(3,405) |
(3,520) |
(3,679) |
(3,873) |
(4,099) |
(4,343) |
||
Short term borrowings |
(919) |
(1,893) |
(1,893) |
(1,893) |
(1,893) |
(1,893) |
(1,893) |
||
Other |
(1,578) |
(1,449) |
(1,449) |
(1,449) |
(1,449) |
(1,449) |
(1,449) |
||
Long Term Liabilities |
|
|
(8,151) |
(6,240) |
(6,240) |
(6,240) |
(6,240) |
(6,240) |
(6,240) |
Long term borrowings |
(5,458) |
(3,744) |
(3,744) |
(3,744) |
(3,744) |
(3,744) |
(3,744) |
||
Other long term liabilities |
(2,693) |
(2,496) |
(2,496) |
(2,496) |
(2,496) |
(2,496) |
(2,496) |
||
Net Assets |
|
|
62,709 |
62,161 |
64,630 |
67,780 |
71,189 |
74,930 |
79,013 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
7,617 |
5,437 |
6,644 |
7,668 |
8,355 |
8,999 |
9,699 |
Net Interest |
(557) |
(394) |
(360) |
(303) |
(282) |
(258) |
(229) |
||
Tax |
(964) |
(727) |
(962) |
(1,190) |
(1,317) |
(1,442) |
(1,578) |
||
Capex |
(4,136) |
(2,400) |
(3,800) |
(4,970) |
(5,294) |
(5,647) |
(6,029) |
||
Acquisitions/disposals |
(75) |
(12) |
0 |
0 |
0 |
0 |
0 |
||
Financing |
199 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Dividends |
(1,117) |
(974) |
(708) |
(905) |
(1,120) |
(1,239) |
(1,356) |
||
Other |
199 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
967 |
930 |
815 |
300 |
343 |
415 |
508 |
||
Opening net debt/(cash) |
|
|
6,004 |
4,473 |
3,527 |
2,712 |
2,412 |
2,069 |
1,655 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
564 |
16 |
0 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
4,473 |
3,527 |
2,712 |
2,412 |
2,069 |
1,655 |
1,146 |
Source: Edison Investment Research, TransContainer data
|
|