TransContainer
Written by
TransContainer |
Runaway market growth |
Q3 results |
General industrials |
1 December 2016 |
Share price performance
Business description
Next events
Analysts
TransContainer is a research client of Edison Investment Research Limited |
|||||||||||||||||||||||||||||||||||||||||||||||
TransContainer’s (TRC) nine-month and Q3 results announcement on 28 November was in line with Edison and market expectations. We leave our forecasts unchanged, but acknowledge that if the Russian rail container market continues to grow at the rate witnessed in recent months, our estimates (five-year EBITDA CAGR 11.3%) will look conservative. We await full year results, which we expect in late March, for a management update on rail container market growth.
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.
Rail containerisation: A runaway success
The main story from TRC’s nine-month and Q3 numbers was the rapid acceleration in growth in its underlying Russian rail container market, which grew 8.2% in comparison to the first nine months of 2015. Growth appears to be accelerating further with an increase in volumes of 18.6% y-o-y in October 2016 according to the RZD Information Centre. With a market share of 47.2% and a modern integrated rail container fleet and service offering, TRC is well placed to offer equity holders exposure to this growth market.
Profitability and cash flow along the right tracks
TRC was able to capitalise on market growth, with a 7.3% increase in volumes feeding into a 13.7% increase in EBITDA 9M16 on 9M15. The 300bp increase in adjusted EBITDA margin came despite increases in maintenance and repair costs and helped drive the group to a net cash position of RUB310m on 30 September even after a 49.7% increase in capex. That said, we expect TRC’s capital budget to increase substantially over the balance of the year and in 2017. Management has guided to RUB3,800m of capex in total this year (implying nearly RUB2,500m in Q4) with a further increase in 2017. Our capex forecasts are already in line with this. It is worth noting that given TRC’s low level of indebtedness and strong operating cash flow, management has ample room to invest in infrastructure and flat cars as the market continues to expand.
Valuation: Optically attractive, country risk weighs
TRC trades at a steep discount to its closest peers internationally on both P/E and EV/EBITDA multiples. However, a one-year forward P/E of 11.5x versus the sector on 17.6x and one-year forward EV/EBITDA of 5.4x versus 8.1x only tells part of the story. We believe it is still fair to reduce TRC’s rating to reflect political risk in Russia. On that basis, we retain our fair value per share of RUB3,400, an 8% discount to its current share price.
Russian rail container market lifting off
While TRC’s results showed solid progress and improving profitability, we believe the main takeaway from the announcement was the significant growth seen in the overall Russian rail container market. The Russian rail container market grew 8.2% in the first nine months of the year, while Q3 growth was 12.4%. The growth trend seems to be accelerating. Management reported that in October the market grew by 18.3% compared to a year earlier and continues to attribute the growth to the increasing overall market share taken by rail containers at the expense of other modes of transport.
Across all routes, TRC transported 1.118m 20-foot equivalent units in the first nine months of 2016, a 7.3% increase on 9M15. In common with the overall market, TRC is enjoying an accelerating growth rate with Q3 volumes across all routes up 12.9% vs 3Q15. We continue to forecast that revenues will rise by a higher percentage in 2017 than 2016 in our unchanged forecasts and the data points we have so far in Q416 seem to reinforce our stance at this early stage.
Exhibit 1: TransContainer H116 vs H115 financial performance
RUB (bn) |
9M15 |
9M16 |
9M-on-9M |
Q315 |
Q316 |
Q3-on-Q3 |
Integrated freight forwarding and logistics services |
9,329 |
9,871 |
5.8% |
3,167 |
3,692 |
16.6% |
Rail-based container shipping services |
3,291 |
3,057 |
-7.1% |
1,162 |
1,042 |
-10.3% |
Terminal services and agency fees |
1,580 |
1,723 |
9.1% |
593 |
629 |
6.1% |
Truck deliveries |
633 |
657 |
3.8% |
234 |
238 |
1.7% |
Other freight forwarding services |
102 |
159 |
55.9% |
32 |
60 |
87.5% |
Bonded warehousing services |
141 |
147 |
4.3% |
49 |
52 |
6.1% |
Other |
77 |
81 |
5.2% |
29 |
25 |
-13.8% |
Total adjusted revenue |
15,153 |
15,695 |
3.6% |
5,266 |
5,738 |
9.0% |
EBITDA |
4,660 |
5,298 |
13.7% |
1,856 |
2,106 |
13.5% |
Adjusted EBITDA margin |
30.8% |
33.8% |
|
35.2% |
36.7% |
|
Profit for the period |
1,925 |
2,641 |
37.2% |
886 |
1,159 |
30.8% |
Adjusted net profit margin |
12.7% |
16.8% |
|
16.8% |
20.2% |
|
Source: TransContainer
■
Integrated freight forwarding and logistics: The 5.8% 9M y-o-y revenue increase was driven by increased volumes across TRC’s domestic, import and export markets. The rate of growth increased in Q3 to 16.6%. As the largest business line, this unit accounts for the largest portion of the 3.6% increase in total group adjusted revenue for the first nine months.
■
Rail-based container transportation services: The 7.1% y-o-y (-10.3% Q3-on-Q3) decline in revenues – the only decline in revenues in the first nine months – was driven, according to management, by customers continuing to switch to integrated logistics services.
■
Terminal services and agency fees: Tariff increases were the main driver behind the 9.1% y-o-y (6.1% Q3-on-Q3) revenue increases in this unit. Volumes were broadly flat.
■
Truck deliveries: The 3.8% y-o-y (1.7% Q3-on-Q3) increase in revenues was due to an increase in TRC’s and third-party volumes over the first nine months, with a tariff increase more than offsetting a drop in volumes in the third quarter.
■
Other freight forwarding and logistics: From a very low base, TRC’s other freight forwarding business grew at a y-o-y rate of 55.9% (87.5% Q3-on-Q3) due to customer demand for value add services together with recovering freight volumes.
■
Bonded warehousing: The 4.3% increase in the first nine months (6.1% Q3-on-Q3) was driven by increased import volumes.
■
Operating expenses: Adjusted operating expenses (excluding third-party charges) increased 1.9% y-o-y to RUB13,334m due to an increase in materials, maintenance, repair and payroll costs offset by declining rent and freight and transportation expenses. It is noteworthy that Q3-on-Q3 adjusted operating expenses increased by 10% to RUB4,744m with a sharp spike in materials and repair and maintenance behind the increase. Adjusted operating expenses as a percentage of adjusted revenue decreased from 86.3% in 9M15 to 85.0%.
Cash flow: Strong cash generation behind net cash position
Cash flow from operations grew by 33.8% y-o-y to RUB4,426m with the strong operating performance the main driver of growth. Capex increased to RUB1,326m from RUB886m. The 49.7% increase versus 9M15 was predominantly invested in the reconstruction and expansion of container terminals in Krasnoyarsk, Yekaterinburg and Irkutsk as well as in acquiring ISO containers. Management guided to RUB3,800m capex spend for FY16, in line with our forecasts, and indicated on the earnings call that capex would increase again in FY17. Despite the increase in capex spend, and due to the increase in operating cash flow and cash flow from financing, TRC increased its cash position to RUB9,180m vs RUB2,748 one year ago, leaving it in a net cash position of RUB310m versus net debt of RUB3,032m one year earlier.
Valuation: Cheap on multiples, country risk remains
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 |
287,176 |
11.3x |
12.0x |
-7.24% |
5.7% |
||||
|
|||||||||
European Transport |
|
||||||||
Globaltrans Investment |
Cyprus |
751 |
1.2x |
1.0x |
14.8x |
11.4x |
16.64% |
3.8% |
|
PKP Cargo |
Poland |
1,993 |
4.8x |
3.8x |
-42.7x |
31.5x |
-4.45% |
0.0% |
|
VTG |
Germany |
802 |
7.1x |
6.8x |
17.5x |
13.8x |
1.81% |
2.2% |
|
Average |
|
4.4x |
3.9x |
-3.4x |
18.9x |
4.67% |
2.02% |
||
|
|||||||||
Emerging markets transport |
|
||||||||
China Railway Tielong Container Logistics Co |
China |
9,139 |
16.6x |
17.4x |
32.7x |
30.3x |
1.38% |
0.9% |
|
Daqin Railway Co |
China |
94,107 |
6.7x |
6.8x |
11.9x |
11.6x |
7.26% |
4.2% |
|
Guangshen Railway Co |
China |
24,135 |
7.0x |
6.5x |
23.7x |
20.8x |
4.25% |
1.9% |
|
Average |
|
10.1x |
10.2x |
22.8x |
20.9x |
4.30% |
2.36% |
||
|
|||||||||
Developed market transport |
|||||||||
Canadian Pacific Railway |
Canada |
29,712 |
11.4x |
10.7x |
19.0x |
16.5x |
3.32% |
0.9% |
|
Union Pacific |
United States |
79,527 |
9.9x |
9.2x |
19.0x |
16.8x |
3.98% |
2.4% |
|
Norfolk Southern |
United States |
27,626 |
9.0x |
8.4x |
17.3x |
15.5x |
1.93% |
2.5% |
|
Canadian National Railway Co |
Canada |
65,192 |
11.7x |
11.0x |
18.9x |
17.3x |
3.93% |
1.8% |
|
Genesee & Wyoming |
United States |
3,928 |
11.0x |
10.2x |
19.3x |
18.0x |
4.77% |
0.0% |
|
CSX Corp |
United States |
26,828 |
8.1x |
7.6x |
16.3x |
14.7x |
3.15% |
2.6% |
|
Aurizon Holdings |
Australia |
9,007 |
8.2x |
8.0x |
16.4x |
16.2x |
3.49% |
5.8% |
|
Average |
9.9x |
9.3x |
18.0x |
16.4x |
3.51% |
2.28% |
|||
TransContainer |
Russia |
51,341 |
6.3x |
5.4x |
14.2x |
11.5x |
6.44% |
1.8% |
|
Overall Transport Average |
8.5x |
8.1x |
14.2x |
17.6x |
4.13% |
2.21% |
|||
Source: Bloomberg, Edison Investment Research. Note: Priced at 29 November 2016.
TRC trades on a 34.6% discount to the average one-year forward P/E multiple of its closest transport peers. It also trades on a 33.3% discount to the average one-year forward EV/EBITDA. However, we believe TRC should remain on a significant discount to its closest international peers given the degree of political risk in Russia. Management has shown its ability to manage capital and operating cash flow during the downturn and TRC is well placed to capitalise on the upturn in the rail container market in Russia. However, we still need to see evidence of improving geopolitical relations in Russia to upgrade our fair value per share of RUB3,400.
Exhibit 3: Financial summary
RUBm |
2014 |
2015 |
2016e |
2017e |
2018e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
20,538 |
20,311 |
21,849 |
23,664 |
25,211 |
EBITDA (company definition) |
|
|
7,816 |
6,526 |
7,599 |
8,771 |
9,533 |
EBITDA (Edison definition) |
|
|
6,544 |
5,744 |
6,778 |
7,826 |
8,492 |
Operating Profit (before amort. and except.) |
4,083 |
3,274 |
4,269 |
5,231 |
5,739 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
4,083 |
3,274 |
4,269 |
5,231 |
5,739 |
||
Net Interest |
(497) |
(356) |
(360) |
(303) |
(282) |
||
Share of assocs/jvs gains/(losses) |
165 |
612 |
673 |
741 |
815 |
||
Forex gains/(losses |
938 |
0 |
0 |
0 |
0 |
||
Other |
18 |
18 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
3,751 |
3,530 |
4,582 |
5,669 |
6,272 |
Profit Before Tax (FRS 3) |
|
|
4,707 |
3,548 |
4,582 |
5,669 |
6,272 |
Tax |
(1,049) |
(717) |
(962) |
(1,190) |
(1,317) |
||
Profit After Tax (norm) |
2,702 |
2,813 |
3,620 |
4,478 |
4,955 |
||
Profit After Tax (FRS 3) |
3,658 |
2,831 |
3,620 |
4,478 |
4,955 |
||
Average Number of Shares Outstanding (m) |
13.7 |
13.7 |
13.7 |
13.7 |
13.7 |
||
EPS - normalised (RUB) |
|
|
286.0 |
138.7 |
264.4 |
327.0 |
361.8 |
EPS - normalised and fully diluted (RUB) |
|
286.0 |
138.7 |
264.4 |
327.0 |
361.8 |
|
EPS - (IFRS) (RUB) |
|
|
267.1 |
206.7 |
264.4 |
327.0 |
361.8 |
Dividend per share (RUB) |
71.0 |
51.7 |
66.1 |
81.8 |
90.5 |
||
EBITDA Margin (%) |
31.9 |
28.3 |
31.0 |
33.1 |
33.7 |
||
Operating Margin (before GW and except.) (%) |
19.9 |
16.1 |
19.5 |
22.1 |
22.8 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
42,012 |
41,739 |
43,030 |
45,404 |
47,945 |
Intangible Assets |
210 |
246 |
246 |
246 |
246 |
||
Tangible Assets |
37,900 |
37,827 |
39,118 |
41,492 |
44,033 |
||
Investments |
3,343 |
3,023 |
3,023 |
3,023 |
3,023 |
||
Other |
559 |
643 |
643 |
643 |
643 |
||
Current Assets |
|
|
6,965 |
7,435 |
8,498 |
9,115 |
9,789 |
Stocks |
340 |
315 |
339 |
367 |
391 |
||
Debtors |
1,542 |
1,392 |
1,497 |
1,622 |
1,728 |
||
Cash |
1,904 |
2,110 |
2,925 |
3,225 |
3,568 |
||
Other |
3,179 |
3,618 |
3,737 |
3,902 |
4,102 |
||
Current Liabilities |
|
|
(5,581) |
(6,747) |
(6,862) |
(7,021) |
(7,215) |
Creditors |
(3,084) |
(3,405) |
(3,520) |
(3,679) |
(3,873) |
||
Short term borrowings |
(919) |
(1,893) |
(1,893) |
(1,893) |
(1,893) |
||
Other |
(1,578) |
(1,449) |
(1,449) |
(1,449) |
(1,449) |
||
Long Term Liabilities |
|
|
(8,151) |
(6,240) |
(6,240) |
(6,240) |
(6,240) |
Long term borrowings |
(5,458) |
(3,744) |
(3,744) |
(3,744) |
(3,744) |
||
Other long term liabilities |
(2,693) |
(2,496) |
(2,496) |
(2,496) |
(2,496) |
||
Net Assets |
|
|
62,709 |
62,161 |
64,630 |
67,780 |
71,189 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
7,617 |
5,437 |
6,644 |
7,668 |
8,355 |
Net Interest |
(557) |
(394) |
(360) |
(303) |
(282) |
||
Tax |
(964) |
(727) |
(962) |
(1,190) |
(1,317) |
||
Capex |
(4,136) |
(2,400) |
(3,800) |
(4,970) |
(5,294) |
||
Acquisitions/disposals |
(75) |
(12) |
0 |
0 |
0 |
||
Financing |
199 |
0 |
0 |
0 |
0 |
||
Dividends |
(1,117) |
(974) |
(708) |
(905) |
(1,120) |
||
Other |
199 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
967 |
930 |
815 |
300 |
343 |
||
Opening net debt/(cash) |
|
|
6,004 |
4,473 |
3,527 |
2,712 |
2,412 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
564 |
16 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
4,473 |
3,527 |
2,712 |
2,412 |
2,069 |
Source: TransContainer, Edison Investment Research
|
|