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.
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.
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%.
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.