Globaltrans - Further Downside Limited

We have adjusted our financial estimates for Globaltrans to reflect lower spot lease rates on the gondola market. This brings our valuation down by 31%, though a lower risk-free rate and equity risk premium have offset roughly half of that impact. We believe the rail transport market has already bottomed and should start improving moving forward. We calculate that Globaltrans's current share price corresponds to a R650/railcar/day spot lease rate for gondolas; though we are not far away from this level at the moment, we argue that it is not sustainable over the long term. We think Globaltrans will cut dividends starting with the payment for 2H20. Yet as our base case envisages a gradual recovery in lease rates starting from 2H21, we expect the dividend yield to stay above 10%. We therefore see long-term fundamental upside in the name and upgrade our recommendation to BUY while decreasing our 12-month cum-dividend DCF-based target price to $8.70 per GDR.> Railcar market momentum should not deteriorate much further. In June, the volume of cargo transported across Russia was down 4.8% y-o-y, meaning a 1H20 decrease of 4.4%. Combined with the fact that operators purchased roughly 10k gondolas in 1H20, this has expanded excess capacity on the market. Given that 2Q20 likely marked the bottom for the economy, we expect the situation to improve going forward.> Current valuation implies R650/railcar/day lease rate, which seems unrealistic. Having updated our model, we calculate that the current share price corresponds to a long-term spot lease rate of R650/railcar/day. The current spot lease rate is R800/railcar/day and has dropped by R200/railcar/day since April, so the R650/railcar/day level could well be reached. However, we do not regard this level as sustainable, as at R650/railcar/day, purchasing new gondolas makes little sense. We expect the lease rate to gradually recover to more sustainable levels of at least R1,300/railcar/day by 2025.> Dividend yield no lower than 10% in base case means upside at new risk-free rate assumption, even under DDM. Assuming a gradual recovery of lease rates starting from 2021, we would not expect Globaltrans's dividend yield to be lower than 10% based on the current market price, and we calculate the average dividend yield in 2021-26 at above 13%. Given that we have lowered our cost of equity assumption for the company from 15.5% to 13.5%, even a DDM valuation would suggest upside to the current share price. > Support from share buyback. Though the size of the buyback approved by the company and currently underway is modest (5% of the capital, or $50 mln), it is equivalent to 60 days of trading and should support the stock.