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TransContainer — Strong Q2 results, led by a rise in productivity

TransContainer — Strong Q2 results, led by a rise in productivity

On 29 August, TransContainer announced Q218 IFRS results. The results showed further growth, with a 6% increase in revenue and 16% growth in EBITDA. We think the main point of interest is how TransContainer has continued to increase productivity by improving the ratio of ‘profit-making runs’ by its containers. The further acceleration in market container volumes in July bodes well for Q3. We have maintained our 2018 EPS but increased our DCF valuation by 2%.

Analyst avatar placeholder

Written by

TransContainer

Strong Q2 results, led by a rise in productivity

Q218 results

General industrials

4 September 2018

Price

RUB4,380

Market cap

RUB61bn

RUB68.3/US$

Net debt (RUBbn) at end Q218

2.25

Shares in issue

13.9m

Free float

50%

Code

TRCN

Primary exchange

MICEX

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

(3.3)

(9.0)

34.8

Rel (local)

(5.3)

(11.0)

15.5

52-week high/low

RUB5,295

RUB3,350

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 event

Q3 results

November 2018

Analyst

Robert Plant

+44 (0)20 3077 5700

TransContainer is a research client of Edison Investment Research Limited

On 29 August, TransContainer announced Q218 IFRS results. The results showed further growth, with a 6% increase in revenue and 16% growth in EBITDA. We think the main point of interest is how TransContainer has continued to increase productivity by improving the ratio of ‘profit-making runs’ by its containers. The further acceleration in market container volumes in July bodes well for Q3. We have maintained our 2018 EPS but increased our DCF valuation by 2%.

Year end

Revenue
(RUBm)

PBT*
(RUBm)

EPS*
(RUB)

DPS
(RUB)

P/E
(x)

Yield
(%)

12/16

21,988

4,302

248

47

17.7

1.1

12/17

27,782

8,195

472

293

9.3

6.7

12/18e

29,031

8,239

460

235

9.5

5.4

12/19e

32,890

9,235

505

253

8.7

5.8

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

Market data in July bodes well for outlook

TransContainer’s revenue showed further growth in Q218 of 6%. Growth was supported by a further improvement in the Russian rail container market, which increased by 11.9% in Q218. The market grew by 16.5% in July, which will provide a helpful tailwind for TransContainer’s Q3 revenue. We believe that the improvement in market container volumes reflects the sequential improvement in the Russian economy.

EBITDA grew even faster than revenue

TransContainer’s Q218 EBITDA growth of 16% was ahead of its revenue growth of 6%. The EBITDA margin rose from 43.8% in Q217 to 47.8% in Q218. We believe the main reason for this was the continued improvement in productivity, especially the increase in ‘profit-making runs’, as TransContainer seeks to reduce the number of empty containers. Profit-making runs reached 81.1% of total runs in H118, the highest ever rate, up from 79.3% in H117. TransContainer’s EBITDA also benefited from a more favourable mix, with further growth in the proportion of revenue from integrated freight forwarding and logistics services, which we believe is TransContainer’s most profitable revenue segment, to 81.9% of revenue in Q218.

Valuation: Increases to RUB5,200/share

We have increased our valuation from RUB5,100/share to RUB 5,200/share to reflect the improvement in trading. This represents 19% upside to the current share price of RUB4,380. Our valuation is based on a discounted cash flow (DCF) model, which uses a WACC of 10.7% and a terminal growth rate of 1%.

Q218 shows further growth in revenue and EBITDA

TransContainer’s Q218 results showed a further y-o-y improvement, especially at the EBITDA level (Exhibit 1). Revenue growth was 6%, less than the 10% in Q118, but EBITDA showed a 16% increase after 10% in Q118.

Exhibit 1: TransContainer’s quarterly results

RUBbn

Q117

Q118

Difference

Q217

Q218

Difference

Revenue*

6.02

6.65

10%

7.0

7.4

6%

EBITDA*

2.14

2.35

10%

3.05

3.54

16%

EBITDA margin

35.6%

35.4%

0%

43.8%

47.8%

9%

Source: TransContainer. Note: *Company-defined metrics.

Revenue boosted by a strengthening market

The improvement in TransContainer’s revenue was led by a further acceleration in the market. Russian rail container market volume growth was 11.9% in Q218 (Exhibit 2). The 16.5% increase in market volumes in July bodes well for TransContainer’s Q3.

Exhibit 2: Russian monthly rail container transportation volumes*

Source: RZD Information Centre (rzu.ru). Note: *ISO containers, loaded and empty.

We note that container volumes have risen sequentially each year. We believe this improvement reflects the better performance of the Russian economy (Exhibit 3) as it recovers from the disruption caused by the conflict between Russia and Ukraine over Crimea in 2014, the resulting international trade sanctions, together with a recovery in global energy commodity prices.

Exhibit 3: Russian real GDP annual growth

2015

2016

2017

2018e

2019e

2020e

Russian real GDP growth %

(2.5)

(0.2)

1.5

1.5

1.8

1.8

Source: The World Bank, June 2018

TransContainer’s 6% revenue growth in Q218 was less than the 12% rise in market container volumes. A reason for this is that TransContainer, the market leader, has continued to lose share to competitors, which we think is natural given it started with a very high share (Exhibit 4).

Exhibit 4: Market shares and change in the Russian rail-based container market

Company

Market share

Share change H118 vs H117

TransContainer

43%

(2.6%)

Other

34%

0.6%

Modul

10%

1.2%

FESCO

6%

0.3%

UTLC

4%

0.2%

FinTrans

3%

0.3%

Total

100%

Source: RZD Information Centre

EBITDA boosted by an improved mix and productivity

TransContainer’s EBITDA rose by 16% y-o-y in Q218, with the EBITDA margin increasing from 43.8% in Q217 to 47.8% in Q218. In our view, one reason for this has been faster growth from the integrated freight forwarding and logistics services segment, which we believe is higher margin (Exhibit 5). The growth in this segment came at the expense of ‘other’ revenues as customers switched services, which resulted in a 50% decline the ‘other’ segment in Q218.

Exhibit 5: TransContainer’s segmental revenues growth y-o-y

Revenue composition

Q118

Q218

Proportion of total Q218 revenue

Integrated freight forwarding and logistics services

76%

44%

82%

Agency fees

28%

10%

10%

Other

-66%

-50%

8%

Total

10%

6%

100%

Source: TransContainer

The integrated freight forwarding and logistics services segment comprised 81.9% of revenues in Q218, up from 73.1% in Q217, continuing the trend of increasing y-o-y as a proportion of revenue (Exhibit 6).

Exhibit 5: TransContainer’s share of revenue comprised by Integrated Services

Source: TransContainer

Another factor that boosted the margin was greater planning efficiency. The proportion of ‘profit-making runs’ rose from 79.3% in H117 to 81.1% in H118 (Exhibit 7).

Exhibit 7: Share of ‘profit-making runs’ (%)

FY14

FY15

FY16

FY17

H117

H118

77.1

74.7

77.3

80.2

79.3

81.1

Source: TransContainer

The rise in the proportion of ‘profit-making runs’ led to a further reduction in freight handling and transportation services costs, by 19% in Q218, which in turn was the main reason for the 5% reduction in total costs (Exhibit 8).

Exhibit 8: Change in costs y-o-y*

Cost item

Q118

Q218

Proportion of Q218 costs

Payroll and related charges

9%

6%

30%

Freight handling and transportation services

(11%)

(19%)

27%

Materials, repair and maintenance

21%

16%

18%

Depreciation and amortisation

9%

8%

15%

Other expenses

117%

(24%)

3%

Taxes other than income tax

108%

(60%)

2%

Consulting and information services

(41%)

52%

1%

Rent

0%

3%

1%

Security

(4%)

(6%)

1%

Fuel costs

5%

3%

1%

Licence and software

111%

6%

1%

Communication costs

6%

19%

0%

Charity

0%

0%

Total

10%

(5%)

100%

Source: TransContainer. Note: *Excludes third-party charges related to principal activities, which are excluded from company-defined revenue.

Net debt remains at a low level

TransContainer has maintained a strong balance sheet position. Net debt of RUB2.25bn at end H118 was almost unchanged compared to the end-FY17 position and represents just 0.19x net debt/EBITDA (Exhibit 9).

Exhibit 9: TransContainer’s net debt

FY14

FY15

FY16

FY17

H118

Net debt (RUBbn)

4.87

3.66

3.53

2.24

2.25

Net debt/EBITDA (x)

0.62

0.56

0.50

0.20

0.19

Source: TransContainer

TransContainer’s net debt is likely to increase over the next three years, mainly on flat cars, as the company increases its capex spend to support an improved trading outlook (Exhibit 10).

Exhibit 10: TransContainer’s capex programme (RUBbn)

FY14

FY15

FY16

FY17

FY18e*

4.5

2.9

2.4

7.4

12.3

Source: TransContainer. Note: *Company guidance.

New forecasts, leaves EPS unchanged

We have maintained our EPS forecasts, with better H118 trading offset by a higher expectation for tax. In 2018, we forecast 14% revenue growth, supported by strong market growth, after 27% in 2017, and an EBITDA margin, which rises from 41.3% in FY17 to 42.6% in FY18, mainly as productivity improvements continue.

Exhibit 11: New forecasts

Adjusted revenue (RUBm)

PBT (RUBm)

EPS (RUB)

Old

New

Change

Old

New

Change

Old

New

Change

2018e

27,970

29,031

4%

7,903

8,239

4%

460

460

0%

Source: Edison Investment Research

Valuation

Our DCF value offers 19% upside to the current share price

We use a DCF model to value TransContainer. We think a DCF is especially suitable for cash-generative companies like TransContainer. Our DCF value for TransContainer is RUB5,200/share (up c 2% from RUB5,100/share), which provides 19% upside to the current share price of RUB4,380 (Exhibit 12). We use a WACC of 10.7%, to reflect Russian country risk, and a terminal growth rate of 1%. The next scheduled event will be Q318 results in November, which could be a positive catalyst if the current growth trend continues.

Exhibit 12: DCF value

RUBm

Total discounted cash flows (FY19-29)

36,256

Discounted terminal value

44,174

Total EV

80,430

Net debt (FY18)

8,179

Equity value

72,250

Number of shares (m)

13.9

Value per share (roubles)

5,200

RUBm

Total discounted cash flows (FY19-29)

Discounted terminal value

Total EV

Net debt (FY18)

Equity value

Number of shares (m)

Value per share (roubles)

36,256

44,174

80,430

8,179

72,250

13.9

5,200

Source: Edison Investment Research

Exhibit 13: Financial summary

RUBm

2016

2017

2018e

2019e

2020e

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

21,988

27,782

29,031

32,890

36,458

EBITDA (company definition)

7,099

11,474

12,375

14,527

16,478

EBITDA

 

 

6,377

10,403

11,678

14,070

16,025

Operating Profit (before amort. and except.)

3,849

7,735

8,774

10,781

12,379

Intangible Amortisation

0

0

0

0

0

Exceptionals

(223)

25

191

0

0

Other

669

704

101

107

113

Operating Profit

4,295

8,464

9,066

10,888

12,493

Net Interest

(216)

(333)

(636)

(1,653)

(2,705)

Profit Before Tax (norm)

 

 

4,302

8,195

8,239

9,235

9,788

Profit Before Tax (FRS 3)

 

 

4,079

8,172

8,430

9,235

9,788

Tax

(835)

(1,638)

(1,896)

(2,216)

(2,349)

Profit After Tax (norm)

2,798

5,764

6,242

6,911

7,325

Profit After Tax (FRS 3)

3,244

6,534

6,534

7,019

7,439

Average Number of Shares Outstanding (m)

13.8

13.9

13.9

13.9

13.9

EPS - normalised (RUB)

 

 

247.5

471.6

459.6

505.1

535.4

EPS - normalised and fully diluted (RUB)

 

247.5

471.6

459.6

505.1

535.4

EPS - (IFRS) (RUB)

 

 

234.7

470.2

470.3

505.1

535.4

Dividend per share (RUB)

46.8

293.0

235.1

252.6

267.7

EBITDA Margin (%) (company definition)

32.3

41.3

42.6

44.2

45.2

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

17.5

27.8

30.2

32.8

34.0

BALANCE SHEET

Fixed Assets

 

 

40,822

45,983

54,692

70,809

85,392

Intangible Assets

290

384

384

384

384

Tangible Assets

37,847

42,196

50,905

67,022

81,605

Investments

2,685

3,403

3,403

3,403

3,403

Current Assets

 

 

11,006

9,756

10,019

10,795

11,512

Stocks

209

287

300

340

377

Debtors

1,605

1,323

1,382

1,566

1,736

Cash

5,603

4,171

4,183

4,183

4,183

Other

3,589

3,975

4,154

4,706

5,216

Current Liabilities

 

 

(8,372)

(7,493)

(7,698)

(8,332)

(8,918)

Creditors

(5,592)

(6,068)

(6,273)

(6,907)

(7,493)

Short term borrowings

(399)

(457)

(457)

(457)

(457)

Long Term Liabilities

 

 

(8,947)

(7,879)

(13,829)

(25,639)

(35,675)

Long term borrowings

(6,357)

(4,987)

(10,937)

(22,747)

(32,783)

Other long term liabilities

(2,590)

(2,892)

(2,892)

(2,892)

(2,892)

Net Assets

 

 

34,509

40,367

43,184

47,632

52,311

CASH FLOW

Operating Cash Flow

 

 

7,421

10,670

12,215

14,678

16,699

Net Interest

(165)

(440)

(636)

(1,653)

(2,705)

Tax

(781)

(1,483)

(1,896)

(2,216)

(2,349)

Capex

(2,277)

(6,974)

(11,612)

(19,405)

(18,229)

Acquisitions/disposals

28

33

0

0

0

Financing

1,024

92

51

54

57

Dividends

(4,830)

(650)

(4,071)

(3,267)

(3,509)

Net Cash Flow

420

1,248

(5,950)

(11,810)

(10,036)

Opening net debt/(cash)

 

 

3,663

3,534

2,241

8,179

19,989

HP finance leases initiated

0

0

0

0

0

Other

(291)

45

12

0

0

Closing net debt/(cash)

 

 

3,534

2,241

8,179

19,989

30,025

Source: Company data, Edison Investment Research

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Regeneus — Several interested parties in Japan

Regeneus has revised expected timing of an osteoarthritis (OA) clinical development licence deal for Progenza in Japan to Q4 CY18 (vs Q218); it is currently in active discussions with several parties. A licence deal would trigger a US$5m milestone payment from partner AGC and would effectively see Progenza commence a Phase II trial in knee OA in Japan. Regeneus is in separate discussions with potential licensees for other indications and territories for Progenza, as well as for its other pipeline products. We roll forward our rNPV model to FY19, which lifts our valuation to A$181m (vs A$170m) or A$0.87/share. Depending on the terms, we estimate an OA licence deal could add up to ~A$50m to our valuation.

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