Globaltrans - A Play on a Continued Gondola Market Recovery

Following our recent transfer of coverage, we update our financial forecasts for Globaltrans, incorporating the recent happenings in the rail freight market. Over the last several months, there have been a number of positive developments within the gondola segment, including an increase in spot rental rates and an improvement in the market data. We expect things to further improve in the segment amid continued volume growth. Spot rental rates have already risen around 40% from recent lows to R950-1,000/day, but we think there is still upside, as we see around R1,500/day as the economically justified level. Given the current balance in the Russian gondola market, we think rates will gradually move toward that level. All in all, we think Globaltrans provides fundamental upside as well as an attractive dividend story with a double-digit yield. We reiterate our BUY recommendation on the stock, raising our 12-month target price to $9.46/GDR (LSE) and assign a 12-month target price of R677/locally listed GDR.> Spot gondola rental rates continue to recover amid strong volume growth. In the beginning of July, rental rates rose by around R150/day to almost R1,000/day. They are now up almost 40% from the four-year low reached three months ago. This is thanks to a recovery in loading volumes, which were up 10.3% y-o-y in May and 10.2% in June, exceeding the May and June levels in the pre-pandemic 2019 by 4.3% and 5.4%, respectively. The biggest contributors to this growth have been coal and building materials, the main cargos for gondola railcars. > We expect the recovery in rates to continue, but gradually. Based on our model for the rail freight market, we forecast that loadings in gondola railcars will increase 4.0% y-o-y this year, exceeding the 2019 level by 1.0%, and then grow at a 1.8% CAGR over 2022-25. Even with the limited gondola car write-offs scheduled over this period, this would require about 60k additional railcars. The need for new rolling stock should become more acute after 2025, when Russia will enter a period of sizable write-offs - around 26k per year. Railcar makers should be able to deliver these volumes, but investments in new railcars will only make sense economically at higher spot rates that are sustained. We think rates would need to reach around R1,500-1,550/day for investments to make sense. We therefore expect rates to move gradually toward that level, eventually reaching it in 2025. > Globaltrans offers a good long-term play on the gondola market recovery, with a double-digit dividend yield. Given that Globaltrans' realized prices lag the spot market, we do not expect the company to benefit much from the higher rates this year. We expect a weak set of 1H21 financial results, with EBITDA down 31% y-o-y at R10 bln, and then only a modest improvement in 2H21, with EBITDA up 1% y-o-y at R12.5 bln. This should translate into R8.4 bln in dividends for 2021, implying an unimpressive 9% dividend yield. However, going forward the ongoing rise in rental rates should drive double-digit earnings growth. We expect EBITDA and attributable FCF to grow at CAGRs of 14% and 22% over 2022-25, which would translate into dividend yields of 13-20% over the period based on the current market price. > Valuation. Our DCF-derived 12-month target price for Globaltrans GDRs is $9.46 for the London listed GDRs and R677 for the locally listed ones based on a 12.1% WACC (with a COE of 15% and COD of 8%) and terminal growth rate of 3%. This implies more than 30% upside from the current level. The stock is trading at EV/EBITDA of 4.5 for 2022 and 4.0 for 2023, which we see as not expensive for a stock with solid FCF and dividend profile (Globaltrans used to trade in a range of 4.0-5.5 on 12-month forward EV/EBITDA). We reiterate our BUY rating on the stock. > Risks. The key downside risks for Globaltrans are macro weakness in the Russian economy, a slower rise in spot gondola rates than we expect, and unfavorable changes in sector regulation and tariffs.