PKP Cargo – Downside Risks All Priced In
PKP stock plummeted more than 35% since our last rating in November, slumping to an all-time low after reports of a continuing decline in shipments and market share. In February we made revisions to our earnings expectations for the Rail Carrier to reflect lower volumes, rising costs of employment and electricity, weaker demand expected in Q1 2020 due to an unseasonably warm winter, and growing negative sentiment for coal, which makes up the bulk of the Company's cargos. More recently, fresh downside risk has emerged in the form of Germany's plans to enforce more stringent rail freight noise requirements a year earlier, underpinned by strike threats from PKP's biggest union. However, the risks look largely priced in at the current level, and so we upgrade PKP to hold, and we cut our target price from PLN 16.40 to PLN 13.89 after incorporating changes in peer valuations. Moving forward, we also see a few upside catalysts emerging for PKP Cargo, such as upcoming changes in labor laws that can potentially put a strain on the Company's competition, alongside a forthcoming restart of ArcelorMittal's steel plant in Krakow (a regular customer before being idled a few months ago), and good PR generated by media stories about Poland's record-high infrastructure investment plans. Equally crucially, PKP Cargo's Management has the power to restore faith in the Company simply by addressing the challenges and proposing solutions and strategies on, among others, how to manage increasing costs.
PKP Cargo SA is a Poland-based company active in the transportation sector. The Company's main activity is domestic and international transport of goods by rail and provision of logistic services in the field of railway cargo transport services. The Company divides its services into six divisions: Transport, offering rail transport carried out by PKP Cargo, road transport and ferry transport; Intermodal, providing intermodal rail transport; Forwarding, services carried out by Trade Trans, Cargosped and PKP Cargo International; Terminals, offering service of reloading terminals; Sidings, providing railway sidings; and Rolling Stock, which provides repairs of the rolling stock. It operates through Advanced World Transport BV (AWT).
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