Event update: Gateway Distripark (Outperformer) - Value accretive transaction; long term positive
Event
Gateway Distriparks (GDL) board has approved acquisition of 49% stake held by Blackstone in Gateway Rail Freight Limited (GRFL, rail business) for a total consideration of Rs8.1bn. This will increase GDL’s stake in GRFL to 99.8% (balance with employees). The acquisition is to be completed within 90 days, subject to statutory and regulatory approvals.
Details
- Blackstone had invested Rs3bn in GRFL for a 49% stake in 2010, in form of CCPS.
- The Blackstone deal values GRFL at Rs16.5bn (10x FY20E EV/EBITDA).
Financial impact and impact on SOTP valuation
- GDL had cash on books of ~Rs3bn at FY18 end (Rs1.3bn in GRFL). Accordingly, we believe GDL would take debt of Rs5-5.5bn to fund the acquisition.
- The consol EBITDA for the CFS & rail business would be ~Rs2.5bn with annual cashflows of ~Rs1.8-2bn in FY20 (post interest cost).
- Considering the impact of Rs5bn debt on interest cost and loss of other income on Rs3bn cash, we believe earnings would be cut by 26% for FY19E (7 month consolidation of rail business; no cut if rail entity consolidated for the whole year) and 12% for FY20E.
- The transaction values GRFL at ~Rs16.5bn vs our valuation of ~24bn (15x FY20E EV/EBITDA). Accordingly, GDL would accrete a net value of Rs3.6bn thereby taking our SOTP to Rs233/share (see pg2).
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We believe the acquisition of the 49% stake from Blackstone for the rail entity addresses a key concern on the stock. We believe the acquisition is value accretive and does not put a strain on the balance sheet. Moreover, GDL can potentially reduce debt over the next year via asset sale of surplus land and reduce the interest cost burden. Overall, we believe the earnings have bottomed and uptick in macro trade should drive momentum in rail business earnings (albeit evacuation issues on line upgradation remain near term concern). Considering our SOTP of Rs233/share, we maintain our Outperformer rating on the stock.
Gateway Distriparks Limited is an integrated logistics facilitator. The Company's principal business activities include storage and warehousing, which includes general merchandise warehouses and warehousing of furniture, automobiles, gas and oil, chemicals and textiles. It also includes storage of goods in foreign trade zones. Its segments include Container Freight Station, which includes common user facilities located at various sea ports in India, offering services for handling (including related transport), temporary storage of import/export laden and empty containers, and cargo carried under customs control, and Rail Logistics, which includes transportation by rail, storage, handling of the containers and related transportation by road. It is also engaged in business of container-related logistics. Its primary business is to operate Container Freight Stations, which are facilities set up for the purpose of in-transit container handling, examination and assessment of cargo.
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