PKP Cargo raised to BUY, TP PLN 20.0 - EBITDA first, capex next

In 2019 PKP Cargo faced the toughest year in terms of volume dynamics on the Polish market since its IPO. It was a surprising drop both for us and for the management. The company entered the year 2019 with significant salary hikes partly fuelled by the market growth in 2017-2018. It now looks to us that a transfer of wealth from millions of pension funds clients (collapsing share price, OFEs as key financial shareholders) to thousands of company employees (salary hikes despite plunging effectiveness when measured by freight turnover per employee) may have reached its end. We now expect higher bargaining power of the management vs. trade unions that may result in a lower pace of salary hikes whereas natural leaves may accelerate workforce reduction. We already noticed in 3Q 19 that the workforce started to decline after increases in 1Q 18-2Q 19 and we expect this should continue in 2020e. We also believe that negative cash flow and growing net debt should be a good argument to limit capex. We give credit to the management and expect lower capex than EBITDA this year and even higher cash flow in 2021e when the market may finally recover. Owing to a significant drop of volumes and freight turnover in 2H 19 (volumes carried by PKP Cargo in Poland down by almost 15% yoy) we cut our TP from PLN 28.0 to PLN 20.0. Nevertheless, we believe that the valuation of the company has reached a bottom and we hike our recommendation from HOLD to BUY in expectation of cost savings and volumes increase, especially in 2H 20e. While our forecast assumes a drop of EBITDA this year (lower average prices), we reckon with 12% growth in 2021e.