PKP Cargo: Light in the tunnel actually a train (downgraded to SELL)

We have downgraded PKP Cargo to SELL from Buy, and cut our price target (PT) to PLN 37.0 (from PLN 77.0). Previously, we expected PKP Cargo, with its high operating leverage and dominant market position, to benefit from the current favourable market situation, with a capacity shortage and rising freight rates. However, the exceptionally weak management guidance issued on 16 March has dashed this scenario completely. We see the PLN 1bn guided annual capex in 2018E (almost double 2017) as neither expected, nor even remotely guided for by PKP Cargo previously. After the recent announcement, it seems that the costs of preparation for the rolling stock at the peak of the cycle could be higher than the actual potential benefits, as the guided EBITDA does not even cover the capex in 2018E and the situation is unlikely to improve in the coming years. Therefore, we believe that the 30% share price slump so far is not enough and we see further downside risk. The management board has also guided for stand-alone EBITDA growth of only 12% (our estimate is at 26% and the market consensus is 24%). This implies a 2018E stand-alone EBITDA margin of 17%, only 0.5ppts higher yoy, despite freight rates in the market being likely to grow steadily due to a capacity shortage. To sum up, we are disappointed with the PLN 1bn in capex and the weak 2018E guidance on the peak cycle momentum, which we see as a missed opportunity, which was within its cash-rich reach, given the company’s market position.