Traveling the Road to Recovery

Kirill Tachennikov
Senior Analyst
OTKRITIE Financial Corporation Ltd

The transportation sector in Russia is represented by a number of tradable companies, such as Aeroflot, NCSP, UTair, which are registered on the RTS and MICEX, and Globaltrans and NCSP which can be found on the London Stock Exchange. Shipping companies and S7 airlines also trade on the market, though these companies are totally illiquid.

During the period July to August 2009, Russia’s largest private rail freight operator, Globaltrans, was the top performer among transportation companies, with its shares gaining almost 40 percent over those two months. In general, railway transportation in Russia showed significant improvement – in January 2009 overall cargo turnover dropped 32 percent year on year, while in July ‘09 the decline had been trimmed to about 11 percent year on year.  Globaltrans outperformed the overall transportation market, posting just a 4 percent decline in turnover in the first half of ‘09, keeping its EBITDA margin under IFRS (35 percent in first half of ‘09 versus 38 percent in the first half of ‘08).  

The GDRs of Novorossiisk Commercial Sea Port (NCSP) also exhibited a substantial price increase for the period under examination (more than 13 percent in July to August). The relatively moderate growth pace was attributable to a rapid increase in market cap over the previous months. Fundamentally, NCSP remains the most resilient company in Russia’s transportation sector, showing a more than 10 percent year on year growth in freight turnover thanks to export oriented clients and the benefits of ruble devaluation. Consequently, we anticipate that NCSP will increase its EBITDA in 2009.

In contrast, stock prices for Aeroflot and UTair have demonstrated flat dynamics over the summer months. Nonetheless, both airlines outperformed the market in the first half of ‘09, showing just 10 percent and 3 percent declines in passenger turnover, respectively. Prices for jet fuel on the global market dropped by almost 50 percent in the second half of ‘09, a trend that the Russian market has followed thanks to the ruble devaluation. On the other hand, during the first quarter of ‘09 the companies experienced a significant decline in load factors, which has almost fully offset the positive effects of cheaper fuel. Although the summer season has brought an improvement in these metrics, as well as in year-on-year dynamics of turnover, we think that the fourth quarter of ‘09 will be a hard time for Russian air carriers. All in all, Aeroflot’s EBITDA margin will be roughly the same as in 2008, while UTair should improve its profitability thanks to the successful performance of its helicopters division. The first half of ‘09 results under RAS support our assumptions.

As for the second half of ‘09, we think that all of the market segments mentioned above have already bottomed, so the situation should not be worse than in the first half of ‘09. In addition, year-on-year dynamics will be better thanks to the low base of the fourth quarter ‘08. That said, we expect ‘09 results to be stronger compared to the first quarter ‘09. The only potential exception is NCSP, which showed only insignificant decline in the fourth quarter of ‘09, but whose turnover growth pace gradually slowed throughout August. According to our calculations, the companies GDR’s have a rather limited upside potential - roughly 20 percent. Our target price is $14 per GDR.

Globaltrans, which was the company most severely impacted by the crunch in the fourth quarter of ‘08 and the first quarter of this year, is likely to be the fastest growing company in the transportation industry in 2010. However, given that the company provides business activity information only twice a year, we see no clear, immediate catalysts that could provoke a substantial increase in Globaltrans’ market share. Although the company still shows about a 30 percent discount in the company’s GDR price, the stock has risen almost six times from its lowest level in 2009 and now is probably too late to buy into it. We have a hold rating for Globaltrans, with target price of $7 per GDR.

 As for Aeroflot and UTair, we advise investors to consider these companies as a defensive asset. Nonetheless, we remain bullish on UTair since we expect to see positive 9M08RAS results in November, which could act as a trigger for the stock. There is still about 60 percent upside, despite a problem with liquidity. We recommend buying into UTair, but the main Aeroflot results are most likely to be neutral, as the company’s performance in the mid-term will reflect the situation in its segment of the market. We expect to see gradual recovery and have hold rating for Aeroflot’s shares.