TransContainer — Structural and cyclical locomotion

TransContainer — Structural and cyclical locomotion

Our increased three-year EBITDA CAGR of 20% for TransContainer is driven by rising rates of ‘containerisation’ in Russian rail freight, a gathering pace of economic rebound in Russia and strong operating efficiency delivered by company management. Our increased forecasts are the main driver behind an increase in fair value to RUB4,900, which implies 23% upside to current levels. The stock offers investors unique exposure to attractive structural and cyclical growth factors in Russia as well as a management team that has shown its ability to manage the business and cash flows during difficult macroeconomic conditions.

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TransContainer

Structural and cyclical locomotion

H1 results

Industrial support services

20 September 2017

Price

RUB3,970

Market cap

RUB54.8bn

RUB57.98/US$

Net debt (RUBm) at 30 June 2017

1,292

Shares in issue

13.8m

Free float

50%

Code

TRCN

Primary exchange

MCIX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

15.9

31.3

8.7

Rel (local)

9.2

18.6

5.4

52-week high/low

RUB4,160

RUB2,940

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

9MQ3 results

December 2017

Analysts

Jamie Aitkenhead

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

TransContainer is a research client of Edison Investment Research Limited

Our increased three-year EBITDA CAGR of 20% for TransContainer is driven by rising rates of ‘containerisation’ in Russian rail freight, a gathering pace of economic rebound in Russia and strong operating efficiency delivered by company management. Our increased forecasts are the main driver behind an increase in fair value to RUB4,900, which implies 23% upside to current levels. The stock offers investors unique exposure to attractive structural and cyclical growth factors in Russia as well as a management team that has shown its ability to manage the business and cash flows during difficult macroeconomic conditions.

Year end

Revenue (RUBm)

PBT*
(RUBm)

EPS*
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/15

20,311

3,530

138.7

251.8

28.6

6.3

12/16

21,988

4,302

202.4

394.4

19.6

10.0

12/17e

26,708

7,702

443.2

177.3

9.0

4.5

12/18e

28,322

7,287

419.3

167.7

9.5

4.2

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

Structural and cyclical growth drivers both positive

‘Containerisation’, or an increasing proportion of Russian rail freight transported by rail containers, continues to be the key structural component of TransContainer’s investment case, with a 6.7% CAGR in the containerisation ratio since 2001. Additionally, the company is benefiting from an increasingly apparent cyclical upturn in Russian rail freight volumes. The resulting double-digit top-line growth trend, combined with the company’s focus on operating efficiencies and continuing shift into integrated logistics, means TransContainer offers investors strong earnings growth, underpinned by attractive trends, at a reasonable valuation.

Earnings increased as outperformance continues

Since TransContainer has now reported a strong increase in half-on-half earnings driven by containerisation growth, we now feel it is appropriate to increase our forecasts and so upgrade our FY17 and FY18 EBITDA (company definition) forecasts by 26% and 21%, respectively. Given management’s strong track record of controlling costs (witnessed once again in Q2 with EBITDA margins hitting 43%), we have confidence in our 40% (company definition) EBITDA margin in FY17.

Valuation: Fair value increased to RUB4,900

We use an average of EV/EBITDA multiples and DCF models in arriving at our fair value of RUB4,900 per share vs RUB3,580 before. Our three-year EPS CAGR is 25%, which looks undemanding given the stock trades on 9.0x FY17 earnings and should be supported by a 4.5% dividend yield. Our fair value offers investors 23% upside to current levels and is supported by strong post-period data from the Russian rail network showing that supernormal growth in rail-container volumes has accelerated since H117 (July 2017 was up 21.3% y-o-y).

Investment summary

Company description: An increasingly integrated offering

TransContainer is the market leader in Russian rail container freight. In recent years it has expanded its customer offering to include truck deliveries and rail handling. On top of its legacy rail freight business this now means the company offers integrated end-to-end logistics services to Russian and international industry. It has revenue exposure to a broad range of industries with a particular exposure to chemicals, consumer goods, paper, construction materials and machine tools.

Valuation: Undemanding given high growth rates

We forecast TransContainer will grow (company definition) EBITDA at a CAGR of 20% in the coming three years. The stock’s 6.0x one-year forward EV/EBITDA versus an average of global transportation and logistics peers of 9.0x looks undemanding in comparison to this growth rate. This is supported by our own DCF valuation of RUB5,051 and our multiple-based valuation RUB4,750, which, when averaged – RUB4,900 – offers equity holders 23% upside to current levels. In other words, trading at current levels, TransContainer’s attractive earnings story, underpinned by structural and cyclical growth drivers, offers investors significant upside to its intrinsic fair value.

Financials: H117 confirms growth trends well established

Following a commodity-driven cyclical downturn in 2014 and 2015, TransContainer’s earnings prospects have since materially improved. The company’s 48% improvement at H117 in EBITDA, driven by top line expansion of 49%, coupled with the fact that end-markets are continuing to grow (+21% July 2017 vs July 2016) gives us confidence in our increased earnings forecasts. Our 52% FY17 year-on-year (company definition) EBITDA growth forecast and 20% three-year (FY16-19) (company definition) EBITDA CAGR are well-supported by current market trends and buttressed by the company’s strong levels of operating efficiency. The result is that our underlying EPS forecasts for FY17 and FY18 are increased by 41% and 29%, respectively.

Sensitivities: Macro and geopolitical risk

TransContainer is principally exposed to macroeconomic risk and political risk.

Macro issues: Given the nature of its end-markets, TransContainer is heavily exposed to economic output in Russia and neighbouring countries. Also, it has direct volume exposure to several commodities including non-ferrous metals. Exposure to both these risks led to a downturn in performance in 2015 and 2016.

Geopolitical issues: The Russian economy has, in recent history, been subjected to economic sanctions. For TransContainer, as an importer and exporter of goods, further sanctions could disrupt its business model and damage its outlook.

Technical issues: Given its concentrated ownership structure, should a large shareholder sell down its stake in TransContainer, there could be short-term pressure on the stock.


Company description: Full steam ahead

TransContainer, a former state-owned firm, was fully listed in 2010. In the intervening period it has transitioned from a rail container-focused operation to a fully integrated freight-forwarding business. TransContainer owns almost all of the assets it uses including 23,561 flatcars, 70,990 ISO containers, 62 rail-side terminals and 184 trucks. It currently has a 46.7% market share in Russian rail-based container transportation. Plus it is number three in rail-side container handling with 19.3% market share. The Russian rail network operator, JSC UTLC, owns 50% plus two shares of the issued equity.

A leader in a rapidly growing market

Two factors underpin TransContainer’s strong current growth trajectory: GDP growth, which in turn drives rail freight volumes; and ‘containerisation’, or an increasing proportion of rail cargo shipped by container. Containerisation levels reached 6.2% in H117 according to the company. This implies a market share CAGR of 6.7% since 2001 and is well below the European average of 14%. This structural earnings driver is complemented by economic growth (currently trending at 2.5% in Q217 although volatile, as 0.5% expansion in Q1 shows) in supporting the observed 20% h-o-h rail container transportation volume growth seen in H117. Given its dominant market position, TransContainer has a strong competitive position from which to benefit from these current trends, although we note that its market share is trending downwards as the market opens up to competition.

Strong management with credentials built in the downturn

TransContainer’s management team have continually shown their competence regarding managing costs and deploying capital, especially during the recent period of economic contraction. In 2014 and 2015, management reduced controllable costs to cushion the effects of the economic downturn (controllable costs declined by 14% in FY14). Likewise, management showed restraint in capital spending in 2015 and 2016 by cutting investment in flatcars as volumes contracted. It is to management’s credit that it has been able to cope with increased flatcar demand in Russia during H117 by improving flatcar utilisation. Management’s focus on cost efficiency and cash conservation underpin our forecasts for EBITDA (company definition) margins to recover to 40% this year.

Increasingly an end-to-end integrated service provider

TransContainer has transitioned its business from a disjointed point-to-point transportation operation to a fully integrated logistics business. In 2013, 41% of the company’s adjusted revenues came from Integrated Freight Forwarding and Logistics. By H117, this figure had climbed to 71%. This is a function of management strategically building out the company’s capabilities in rail-terminal handling and last mile transportation. Given most of the company’s key customers and end-markets are complex and multinational in nature, this integrated offering makes sense from a competitive positioning perspective. Ultimately, this should allow TransContainer to grow market share in the overall transportation and logistics market in Russia and grow profitability too.


Operations and strategy: Well-managed growth

With a 46.7% market share in rail-based container transportation and a 19.3% share of terminal handling, TransContainer has a strong competitive position in key Russian rail segments and offers investors a solid means of exploiting strong rail cargo volume growth. Management has invested in the provision of a fully integrated end-to-end customer offering noted for high service levels and a strong focus on operating efficiency. For shareholders, TransContainer offers a unique way to play attractive growth trends with the protection of a well-regarded management team.

Exhibit 1: TransContainer operating activities

Source: Edison Investment Research, TransContainer data

Structural growth: Containerisation makes sense in Russia

Despite its suitability (ie, large land area and long shipping distances), Russia has always lagged other large economies in terms of rail containerisation rates. Currently, the rate of 6.2% compares to Europe on 14%, India on 16% and the US on 18%. This is a marked increase from 2.2% in Russia in 2001 but illustrates the potential for further growth. Given the cost advantage to Russian industry from transitioning away from either truck or rail boxcars, we believe the 6.7% CAGR in market share for containerised rail freight is likely to continue.

Cyclical growth: Commodity and economic recovery underway

In H117 Russian rail container volumes grew by 19.8% versus the same period a year earlier. In July, the growth rate was 21.3% versus July 2016. Management attributes the bulk of this growth to increased rail containerisation. However, we should note that after slowing in 2014 and contracting in 2015, Russian economic output started to grow modestly in Q416 and in Q217 grew by a y-o-y rate of 2.5%. This has taken place against a backdrop of recovering commodity prices, which are important for the Russian economy and TransContainer’s customers. Several of the company’s most important verticals are heavily cyclical such as chemicals, construction and machine tools. This gives us confidence TransContainer will continue to see demand growth in the coming months.

Strategy: Steaming towards a more integrated offering

TransContainer’s business model has transitioned to focus on ‘Integrated Freight Forwarding and Logistics’ in comparison to its more disjointed customer offering in the past. 71% of revenues in H117 came from ‘integrated’ services. This compares favourably with 41% in FY13. For customers, integration means goods can be shipped end-to-end and require only one freight handler rather than several with niche skillsets such as truck deliveries, terminal handling, etc. This has the twin effect of significantly enhancing TransContainer’s competitive offering while allowing shareholders to benefit from superior returns via efficiency and scale gains.

Operations: Utilisation rates, investments and efficiency

In H117, management managed the operating fleet’s performance very well. 79% of freight runs were ‘profit making’ rather than ‘empty run’. This is in comparison to 77% in FY16 and 74% in FY15. Management were able to absorb the significant uplift in demand without any new flatcars, although capex is forecast to increase in FY17 to c RUB8bn with c RUB5bn to be invested in new flatcars, which is a sign of management confidence in continued recovery. In other words, TransContainer’s management has proved itself capable of reducing controllable costs and investment to protect cash flow in the face of end-market weakness in 2014 and 2015 and has now shown the capacity to increase utilisation and investment as demand recovers.

Forecasts, cost management and investments

TransContainer will grow EBITDA (company definition) by a CAGR of 20% between FY16 and FY19 based on our earnings forecasts. The bulk of the growth will come from Integrated Freight Forwarding as this continues to be a focus area for management. The main driver of revenue growth is rail container volume growth, which has averaged 8.3% since 2001. This, in turn, is supported by rail containerisation – rail container cargo as a percentage of overall rail freight has grown at an average of 6.7% since 2001 – and GDP growth, which for several years has been patchy at best.

Exhibit 2: Divisional adjusted revenue growth forecasts

RUBm

2013

2014

2015

2016

2017e

2018e

2019e

Integrated Freight Forwarding and Logistics Services

10,437

11,352

12,518

14,126

18,929

20,538

22,284

Cargo Transport & Handling, with 3rd Parties

0

0

0

0

0

0

0

Rail-based Container Shipping Services

8,154

5,405

4,390

4,061

4,264

4,371

4,480

Terminal Services and Agency Fees

4,181

2,167

2,130

2,393

2,537

2,562

2,588

Truck Deliveries

1,367

978

848

875

350

210

214

Other Freight Forwarding Services

571

283

134

226

267

272

280

Bonded Warehousing Services

317

234

194

203

240

244

252

Other

301

119

97

104

123

125

129

Total Adjusted Revenue

25,328

20,538

20,311

21,988

26,708

28,322

30,226

Source: TransContainer data, Edison Investment Research

During H117, TransContainer managed to keep its controllable cost (controllable costs are defined by management as all internal costs less third-party costs associated with integrated freight forwarding) increase to 15% despite the 20% increase in the top line. Management said it managed to keep empty run rates, salaries and administration costs under control. It also attributed the efficient performance to improved fleet management and optimisation measures taken at terminals. This enabled TransContainer to post H117 (company definition) EBITDA margins of 40% and Q2 margins of 44%. In this context, our 40% margin forecast for FY17 looks realistic. We base our cost forecasts on management guidance, the margin improvement witnessed over H117 and on a realistic (company definition) EBITDA margin target of c 40%.

Exhibit 3: Operating expense forecasts

RUBm

2,013

2,014

2,015

2,016

2017e

2018e

2019e

Third-party charges related to principal activities

13,836

16,027

22,194

29,495

35,452

38,193

41,146

Freight and Transportation Services

4,315

4,979

5,858

5,972

6,689

7,224

7,802

Payroll and Related Charges

5,048

4,609

4,507

5,244

5,611

6,004

6,424

Materials, Repair and Maintenance

2,985

2,419

2,275

2,605

2,787

2,857

2,928

Depreciation and Amortisation

1,943

2,461

2,470

2,528

2,488

2,982

3,123

Taxes Other than Income Tax

724

631

521

543

581

596

610

Rent

1,869

443

638

311

333

341

350

Other Expenses

2,139

1,628

1,579

1,596

1,708

1,750

1,794

Total Operating Expenses

32,859

33,197

40,042

48,294

55,648

59,947

64,178

Source: TransContainer data, Edison Investment Research

We forecast FY17 capex will increase to c RUB8bn in line with company guidance. The bulk of the investment (c RUB5bn) will be in new flatcars, which will be required due to high levels of current demand growth.

Exhibit 4: Capex split historic and forecast

RUBbn

2013

2014

2015

2016

2017e

Investments in Flatcars

3.7

2.7

0.0

0.0

5.0

Investments in Containers

0.9

0.3

0.8

0.8

1.0

Terminals Development

1.2

0.6

0.9

0.7

1.3

Other Capex

0.6

0.5

0.7

0.7

0.6

Total

6.4

4.1

2.4

2.2

7.9

As a % of sales

25%

20%

12%

10%

33%

Source: TransContainer data, Edison Investment Research

Management

TRC Chairman Andrey Starkov, a graduate of the Moscow State Textile University and the Moscow State University of Economics, previously carried out several roles at JSC RZD. General Director of TransContainer Petr Baskakov and his team have managed the business over the last decade. Mr Baskakov, in common with several other directors, has had a long career in the Russian rail industry. His 24 years in the industry started after graduating from the Moscow Institute for Railway Transport Engineers in 1986 with a degree in the management of railway transportation processes.

Sensitivities

TRC has sensitivities ranging from macro factors such as economic output to several technical factors such as illiquidity:

The main earnings sensitivity is to Russian GDP growth. Rail container volume growth has traditionally moved within a range of 2.1x to 6.3x year-on-year GDP changes.

TRC’s market share fell from 60% in 2006 to 47% in 2015, reflecting market liberalisation and the introduction of competition. However, this has stabilised over the last couple of years.

Valuation is sensitive to equity risk premium. Politics and geopolitics can change very rapidly in Russia, and do so without warning.

Stock liquidity – UTLC retains its 50%+2 shares ownership stake so TRC has a low free float of 50%-2.

Additionally, there are several other large shareholders so liquidity is restricted.

Currency – The strength or weakness of the ruble versus other currencies, most notably the euro, affects import and export flows and hence TRC’s freight volumes.

Trade – Import, export and transit account for 45% of TRC’s volumes and so are affected by Russia’s trade volumes and balance.

Valuation

We take two valuation methodologies into account in arriving at our fair value of RUB4,900 per share, an increase of 37% from our previous fair value of RUB3,580. We compare TransContainer to its closest listed peers on an EV/EBITDA basis and apply a 7.0x multiple to the company’s next full year EBITDA, which is a 23% discount to the global average, and implies a fair value of RUB4,750 per share. We also conduct a DCF analysis (WACC 9.8%, terminal growth 3%), which implies a fair value of RUB5,051 per share. The average of the two methodologies is RUB4,900 per share, which offers investors 23% upside. This fair value increase is primarily driven by the enhanced cash flow outlook for the business as well as a lower cost of capital in the case of the DCF and slightly higher multiple (7.0x vs 6.7x) in the multiple-derived model, as well as the benefit of a rolled-forward (and increased) EBITDA forecast.

Global peer comparison

As shown in Exhibit 6, the global average of transportation and logistics stocks is 9.0x next year EV/EBITDA. However, the same figure for Europe-listed names is only 5.2x, while in emerging markets the figure is 13.7x, albeit this is skewed by one outlier. Stripping out the effect of this one stock, the average is 7.6x. Furthermore Globaltrans, another Russian freight company, trades at 4.8x one-year forward EV/EBITDA. In this context and taking into account TransContainer’s mixture of emerging and developed market exposure, in tandem with macro/commodity and geopolitical risk, we believe a 7.0x one-year forward EV/EBITDA multiple is appropriate. The fair value per share implied by this is RUB4,750 per share.

Exhibit 5: EV/EBITDA multiple-derived fair value per share

RUBm

FY18e EBITDA (company definition)

11,143

Multiple

7.0x

EV

78,003

FY17 net debt

11,288

Pension liability

1,067

Equity value

65,648

Number of shares (m)

14

Equity value per share (RUB)

4,750

Current share price (RUB)

3,970

Current market cap

54,872

Upside/downside (%)

20%

RUBm

FY18e EBITDA (company definition)

Multiple

EV

FY17 net debt

Pension liability

Equity value

Number of shares (m)

Equity value per share (RUB)

Current share price (RUB)

Current market cap

Upside/downside (%)

11,143

7.0x

78,003

11,288

1,067

65,648

14

4,750

3,970

54,872

20%

Source: Edison Investment Research

See Exhibit 6 for a global peer comparison.

Exhibit 6: TransContainer international peer comparison

Market Cap (local m)

Current EV/ EBITDA

Next EV/ EBITDA

Current P/E

Next P/E

Div Yield This Yr

European Transport

 

Globaltrans Investment PLC

RUSSIA

1,778

5.2x

4.8x

10.6x

9.8x

3.8%

PKP Cargo SA

POLAND

2,817

5.3x

4.2x

53.3x

14.1x

0.0%

VTG AG

GERMANY

1,325

8.6x

6.7x

26.2x

19.3x

2.2%

Average

 

6.4x

5.2x

30.0x

14.4x

2.02%

 

Emerging Markets Transport

 

China Railway Tielong Container Logistics Co Ltd

CHINA

15,953

26.9x

25.8x

48.1x

43.6x

0.9%

Daqin Railway Co Ltd

CHINA

131,720

7.2x

7.0x

10.5x

10.2x

4.2%

Guangshen Railway Co Ltd

CHINA

29,731

9.0x

8.2x

33.7x

27.3x

1.9%

Average

 

14.3x

13.7x

30.8x

27.0x

2.36%

 

Developed Market Transport

Canadian Pacific Railway Ltd

CANADA

29,090

10.9x

10.3x

17.3x

15.4x

0.9%

Union Pacific Corp

US

90,443

10.4x

9.7x

19.5x

17.5x

2.4%

Norfolk Southern Corp

US

36,830

10.4x

9.8x

20.2x

18.2x

2.5%

Canadian National Railway Co

CANADA

75,795

12.2x

11.6x

19.8x

18.4x

1.8%

Genesee & Wyoming Inc

US

4,418

9.8x

9.0x

23.8x

19.7x

0.0%

CSX Corp

US

47,291

11.2x

10.0x

23.0x

19.1x

2.6%

Aurizon Holdings Ltd

AUSTRALIA

10,207

8.9x

8.6x

18.8x

17.1x

5.8%

Average

10.6x

9.9x

20.4x

17.9x

2.28%

Overall Transport Average

9.7x

9.0x

23.2x

17.8x

2.08%

TransContainer PJSC

RUSSIA

54,468

6.2x

6.0x

9.0x

9.5x

4.5%

Source: Bloomberg data, Edison Investment Research. Note: Priced on 20 September 2017. TransContainer multiples based on Edison forecasts

DCF

Our DCF implies a fair value of RUB5,051 per share. We explicitly forecast four years of cash flows, discount them at 9.8% and apply a 3% terminal growth rate.

Exhibit 7: TransContainer discounted cash flow analysis

DCF valuation

(RUBm)

EV

82,172

FY17 Net debt

11,288

Pension Liability

1,067

Equity value

69,816

Number of shares (m)

14

Equity value per share (RUB)

5,051

Current share price (RUB)

3,970

Current market cap

54,872

Upside/downside (%)

27%

2017e

2018e

2019e

2020e

Terminal value

EBIT

7,172

7,228

7,855

8,540

Less cash taxes

(1,577)

(1,492)

(1,644)

(1,815)

Tax rate

20%

20%

20%

20%

NOPLAT

5,595

5,737

6,211

6,725

Working capital

(342)

-74

(116)

(126)

Add back depreciation

2,488

2,982

3,123

3,278

Less capex

(7,900)

(5,098)

(5,441)

(5,811)

Free cash flow

(159)

3,546

3,777

4,065

6,594

FCF growth

-

-

6.5%

7.6%

3.0%

WACC

9.8%

9.8%

9.8%

9.8%

9.8%

Discount factor

1.0

0.9

0.8

0.8

0.8

Discount cash flow

(159)

3,229

3,132

3,069

72,901

NPV

82,172

Source: Edison Investment Research

Sensitivities

In Exhibit 8 we flex our DCF assumptions and find that for a 1% increase in our WACC assumption, our fair value per share decreases by RUB810 (16%), and for a 1% decrease in our WACC assumption our fair value per share increases by RUB1,089 (22%).

Exhibit 8: TransContainer discounted cash flow sensitivity analysis (RUB/share)

Discount rate

7.8%

8.8%

9.8%

10.8%

11.8%

Terminal
growth rate

1.0%

7,587.3

6,062.4

4,986.2

4,186.7

3,569.8

2.0%

7,635.9

6,101.6

5,018.7

4,214.3

3,593.6

3.0%

7,684.5

6,140.7

5,051.3

4,241.9

3,617.4

4.0%

7,733.1

6,179.9

5,083.8

4,269.5

3,641.2

5.0%

7,781.6

6,219.0

5,116.3

4,297.1

3,665.1

Source: Edison Investment Research

Financials

We increase our earnings across the forecast period to reflect the much enhanced reported operating performance at H117. Our 26% FY17 and 21% FY18 (company definition) EBITDA forecast increases are driven by 12% adjusted revenue forecast increases in both years together with operating cost control delivering a return to 40% EBITDA margins (company definition). This flows down the income statement resulting in an increase in underlying EPS of 41% in FY17 and 29% in FY18. We increase the dividend payout ratio to reflect the improved operating performance. Despite our capex forecast for FY17 remaining unchanged, our net debt estimate for FY17 is higher as a result of a higher than expected dividend payment (totalling RUB5.45bn).

Exhibit 9: Edison earnings forecast changes

RUBm

2017e

2018e

2019e

New Integrated Freight Forwarding and Logistics Revenues

18,929

20,538

22,284

Old Integrated Freight Forwarding and Logistics Revenues

15,750

17,089

18,542

± New vs old

20.2%

20.2%

20.2%

New Rail Based Container Shipping Revenues

4,264

4,371

4,480

Old Rail Based Container Shipping Revenues

4,163

4,267

4,373

± New vs old

2.4%

2.4%

2.4%

New Terminal Services and Agency Fees Revenues

2,537

2,562

2,588

Old Terminal Services and Agency Fees Revenues

2,417

2,441

2,466

± New vs old

5.0%

5.0%

5.0%

New Truck Deliveries Revenues

350

210

214

Old Truck Deliveries Revenues

893

910

929

± New vs old

-60.8%

-76.9%

-76.9%

New Other Revenues

629

642

661

Old Other Revenues

538

549

566

± New vs old

16.8%

16.8%

16.8%

New Adjusted Revenues

26,708

28,322

30,226

Old Adjusted Revenues

23,761

25,256

26,875

± New vs old

12.4%

12.1%

12.5%

New EBITDA (company definition)

10,795

11,143

12,161

Old EBITDA (company definition)

8,562

9,238

10,153

± New vs old

26.1%

20.6%

19.8%

New EBIT (company definition)

7,172

7,228

7,855

Old EBITDA (company definition)

4,938

5,234

5,752

± New vs old

45.2%

38.1%

36.6%

New EPS (RUB)

443

419

462

Old EPS (RUB)

315

325

364

± New vs old

40.8%

29.0%

27.1%

New DPS (RUB)

177

168

185

Old DPS (RUB)

79

81

91

± New vs old

125.3%

106.4%

103.4%

New net debt

11,288

10,943

10,199

Old net debt

6,215

5,401

4,366

± New vs old

81.6%

102.6%

133.6%

Source: Edison Investment Research

H117 results showed recovery well underway

H117 numbers showed TransContainer is operating in a very strong market and, through its focus on operating and cost efficiency, is able to convert this into strong earnings growth. Our three-year (company definition) EBITDA CAGR of 20% and underlying three-year EPS CAGR of 25% demonstrate its strong growth trajectory.

Exhibit 10: TransContainer half year earnings progression

RUBm

H115

H215

FY15

H116

H216

FY16

H117

H217e

FY17e

Integrated Freight Forwarding and Logistics Services

6,162

6,356

12,518

6,179

7,947

14,126

9,209

9,720

18,929

Rail-based Container Shipping Services

2,129

2,261

4,390

2,015

2,046

4,061

1,648

2,616

4,264

Terminal Services and Agency Fees

987

1,143

2,130

1,189

1,204

2,393

1,624

913

2,537

Truck Deliveries

399

449

848

419

456

875

346

4

350

Other revenues

70

64

425

155

71

533

158

471

629

Total Adjusted Revenue

9,747

10,273

20,311

9,957

11,724

21,998

12,985

13,723

26,708

EBITDA (company definition)

2,804

3,722

6,526

3,192

3,907

7,099

5,192

5,603

10,795

Adjusted EBITDA margin [%]

28.8%

36.2%

32.1%

32.1%

33.3%

32.3%

40.0%

40.8%

40.4%

Profit for the period

1,039

1,792

2,831

1,412

1,832

3,244

2,836

3,290

6,126

Adjusted net profit margin [%]

10.7%

17.4%

13.9%

14.2%

15.6%

14.8%

21.8%

24.0%

22.9%

Source: TransContainer accounts, Edison Investment Research

Cash flow and balance sheet

TransContainer will increase its capex spend during FY17 as it invests in new flatcars. Thereafter we forecast the group will reduce capex to the RUB5bn to RUB6bn range. We forecast the group will payout 40% of underlying earnings to shareholders, which will equate to a cash payment of c RUB2.5bn (note this comes after a large RUB5.45bn dividend payment relating to FY16, paid in FY17). Therefore, from FY18, based on operating cash flows of just over RUB10bn, TransContainer will generate enough cash flow to finance its capital requirements and dividend obligations while also paying down a moderate amount of debt. That said, net debt to (company definition) EBITDA of 1.1x in FY17 and 1.0x in FY18 do not give cause for alarm and are, in fact, another indicator of a company positioned sensibly for cyclical end markets.

Exhibit 11: Financial summary

RUBm

2014

2015

2016

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

20,538

20,311

21,988

26,708

28,322

30,226

EBITDA (company definition)*

 

 

7,816

6,526

7,099

10,795

11,143

12,161

EBITDA

 

 

6,544

5,744

6,377

9,660

10,210

10,978

Operating Profit (before amort. and except.)

4,083

3,274

3,849

7,172

7,228

7,855

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

0

0

0

0

0

0

Other

0

0

0

0

0

0

Operating Profit

4,083

3,274

3,849

7,172

7,228

7,855

Net Interest

(497)

(356)

(216)

(206)

(750)

(715)

Share of assocs/JVs gains/(losses)

165

612

669

736

809

890

Forex gains/(losses

938

0

(223)

0

0

0

Other

18

18

0

0

0

0

Profit Before Tax (norm)

 

 

3,751

3,530

4,302

7,702

7,287

8,030

Profit Before Tax (FRS 3)

 

 

4,707

3,548

4,079

7,702

7,287

8,030

Tax

(1,049)

(717)

(835)

(1,577)

(1,492)

(1,644)

Profit After Tax (norm)

2,702

2,813

3,467

6,126

5,796

6,386

Profit After Tax (FRS 3)

3,658

2,831

3,244

6,126

5,796

6,386

Average Number of Shares Outstanding (m)

13.7

13.7

13.8

13.8

13.8

13.8

EPS - normalised (RUB)

 

 

286.0

138.7

202.4

443.2

419.3

462.0

EPS - normalised fully diluted (RUB)

 

286.0

138.7

202.4

443.2

419.3

462.0

EPS - (IFRS) (RUB)

 

 

267.1

206.7

234.7

443.2

419.3

462.0

Dividend per share (RUB)

71.0

251.8

394.4

177.3

167.7

184.8

EBITDA margin (IFRS) (%)

31.9

28.3

29.0

36.2

36.1

36.3

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

19.9

16.1

17.5

26.9

25.5

26.0

BALANCE SHEET

Fixed Assets

 

 

42,012

41,739

40,822

48,234

50,350

52,668

Intangible Assets

210

246

290

290

290

290

Tangible Assets

37,900

37,827

37,485

44,897

47,013

49,331

Investments

3,343

3,023

2,685

2,685

2,685

2,685

Other

559

643

362

362

362

362

Current Assets

 

 

6,965

7,435

11,006

7,827

10,610

13,724

Stocks

340

315

209

254

269

287

Debtors

1,542

1,392

1,605

1,950

2,067

2,206

Cash

1,904

2,110

5,525

1,710

4,055

6,799

Other

3,179

3,618

3,667

3,914

4,218

4,431

Current Liabilities

 

 

(5,581)

(6,747)

(8,372)

(8,666)

(9,030)

(9,285)

Creditors

(3,084)

(3,405)

(4,279)

(4,573)

(4,937)

(5,192)

Short term borrowings

(919)

(1,893)

(2,762)

(2,762)

(2,762)

(2,762)

Other

(1,578)

(1,449)

(1,331)

(1,331)

(1,331)

(1,331)

Long Term Liabilities

 

 

(8,151)

(6,240)

(8,947)

(12,947)

(14,947)

(16,947)

Long term borrowings

(5,458)

(3,744)

(6,236)

(10,236)

(12,236)

(14,236)

Other long term liabilities

(2,693)

(2,496)

(2,711)

(2,711)

(2,711)

(2,711)

Net Assets

 

 

62,709

62,161

69,147

77,674

84,937

92,624

CASH FLOW

Operating Cash Flow

 

 

7,617

5,437

7,421

9,318

10,136

10,862

Net Interest

(557)

(394)

(165)

(206)

(750)

(715)

Tax

(964)

(727)

(781)

(1,577)

(1,492)

(1,644)

Capex

(4,136)

(2,400)

(2,192)

(7,900)

(5,098)

(5,441)

Acquisitions/disposals

(75)

(12)

(128)

0

0

0

Financing

199

0

517

0

0

0

Dividends

(1,117)

(974)

(4,830)

(5,451)

(2,450)

(2,318)

Other

199

0

517

0

0

0

Net Cash Flow

967

930

(158)

(5,815)

346

744

Opening net debt/(cash)

 

 

6,004

4,473

3,527

3,473

11,288

10,943

HP finance leases initiated

0

0

0

0

0

0

Other

564

16

212

(2,000)

0

0

Closing net debt/(cash)

 

 

4,473

3,527

3,473

11,288

10,943

10,199

Source: Company accounts, Edison Investment Research. Note: *Company definition of EBITDA is PBT + interest expense + depreciation and amortisation.

Contact details

Revenue by geography

Oruzheyniy Pereulok 19

Moscow, Russian Federation 125047

www.trcont.ru/

+7 495 788 17 17

N/A

Contact details

Oruzheyniy Pereulok 19

Moscow, Russian Federation 125047

www.trcont.ru/

+7 495 788 17 17

Revenue by geography

N/A

Management team

Chairman of the Board of Directors: Andrey Starkov

Chief Executive: Petr Baskakov

Andrey Starkov, a graduate of the Moscow State Textile University and the Moscow State University of Economics, previously carried out several roles at JSC RZD including company secretary.

CEO since 2006, Mr Baskakov has over 24 years of experience in Russian railways. He is a graduate of the Moscow Institute of Railway Transport Engineers with a degree in the management of railway transportation processes. Prior to joining TRC, Mr Baskakov worked at Podolsk Production and Railway Transportation Enterprise and, from 1993, he was head of Moskva-TovarnayaKurskaya station, a Moscow rail-side cargo terminal.

Management team

Chairman of the Board of Directors: Andrey Starkov

Andrey Starkov, a graduate of the Moscow State Textile University and the Moscow State University of Economics, previously carried out several roles at JSC RZD including company secretary.

Chief Executive: Petr Baskakov

CEO since 2006, Mr Baskakov has over 24 years of experience in Russian railways. He is a graduate of the Moscow Institute of Railway Transport Engineers with a degree in the management of railway transportation processes. Prior to joining TRC, Mr Baskakov worked at Podolsk Production and Railway Transportation Enterprise and, from 1993, he was head of Moskva-TovarnayaKurskaya station, a Moscow rail-side cargo terminal.

Principal shareholders

(%)

UTLC

50.0%

FESCO

25.1%

TransFinGroup

15.7%

Companies named in this report

Globaltrans (GLTR LSE), PKP Cargo SA (PKP WSE), VTG AG (VTG ASX), China Railway Tielong Container Logistics Co Ltd (0390 HKG), Daqin Railway Co Ltd

(601006 SHA), Guangshen Railway Co Ltd (GSH NYSE), Canadian Pacific Railway Ltd (CP TSE), Kansas City Southern (KSU NYSE), Union Pacific Corp (UNP

NYSE), Norfolk Southern Corp (NSC NYSE), Canadian National Railway Co (CNR TSE), Genesee & Wyoming Inc (GWR NYSE), CSX Corp (CSQ NASDAQ),

Aurizon Holdings Ltd (AJZ ASX)

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by TransContainer and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Consumer

PPHE Hotel Group — Going places

PPHE has arguably trumped its strong H117 results by highlighting its “unprecedented financial position,” which provides exciting scope for management with an enviable development record. Excess liquidity is substantial (we estimate £250+m cash after Waterloo sale backed by a valuation surplus) and its deployment is actively under review. Meanwhile impressive +23% H117 EBITDA despite headwinds and a positive outlook have led us to raise forecasts, if marginally. Heartland London recovered well, with key openings soon making their mark. A meagre rating belies PPHE’s proven profit delivery and asset backing (fair value c £18/share).

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