PKP Cargo – Sidetracked By Costs
Polish rail freight traffic is expected to grow 4% in 2020, but the freight moved by PKP Cargo ("PKP") in the same year will probably increase at a slower pace of an estimated 1% in the wake of reduced coal volumes carried for ArcelorMittal's temporarily-idled Polish steel plant in Krakow. We believe PKP can nevertheless increase revenues an annual rate of 2.5% next year, however, the topline gains will most likely be outpaced by expenses, most notably the rising costs of electricity (+PLN 57m) and labor (+PLN 112m). The latter category in particular presents a major challenge for the future due to the age structure of the workforce, with 70% of current employees aged 46 or over, and at least 15% set to reach retirement age in 6-7 years. Our FY2020 forecasts for PKP point to a 9% fall to PLN 805m in adjusted EBITDA. This, combined with high capital expenditures in an estimated amount of PLN 969m will most likely result in further free cash flow deterioration from an already negative PLN -103m expected in 2019 to PLN -132m in 2020. As a consequence, we believe that PKP will be forced to suspend shareholder distributions for a period of three years. Compared to our forecasts, we see room for analysts to revise their respective 2020 and 2021 EBITDA consensus for PKP downward by 18% and 20%. We initiate coverage of PKP Cargo with a reduce recommendation and a target price of PLN 20.44 per share.
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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