Quicky #18 on Globaltrans (GLTR LI)

Russia is a market segment shun by investors. It’s also a vast country. What better way to transport bulk by rail? …

This is not investment advice. Please read the disclaimer.
I currently own shares (economic interest) in mentioned or related companies.

Globaltrans Investment Plc (the company or Globaltrans) has a $1bn market cap and offers rail fright transportation services to its customers, mainly in Russia – the biggest country on earth – but also in other close-by countries. Globaltrans also leases rolling stock to its customers.

The company was on my todo-list since Oct 2019 when I read this linkedin article. I like this (sometimes random) process of writing down an idea or starting a draft post and then doing nothing for a long time. Forgetting the reasons why initially noting an idea and then starting anew makes some sense for me. It helps making ones own mind.

Its shares (depository receipts) are listed in London (international: GLTR LI) since 2008 and since October last year there is a secondary listing in Moscow (MOEX: GLTR RM). The shares trade on a mid-single digit P/E and a 1.6x P/B.

  • The shares’ listing in Moscow and GDRs Inclusion in Moscow Indeces could strongly lever a repricing of the stocks if investor sentiment ever changes towards Russia

Asking why GLTR could be good value or strongly underpriced for its risks might be warranted before looking at the company:

  1. Everything Russian is kind of toxic and shun by US investors
    • and looks rather cheap (sometimes for good reasons)
  2. It’s a mid cap boring asset heavy old-economy business existing in the real world
    • and currently, everybody is looking for the next Google
  3. The business depends on the economic cycle which is currently so-so
    • and sought-after businesses must bring recurring-revenue subscriptions

This is another part of my series of Quickies on new companies.

Globaltrans operates in in the largest country on earth. Thus it is exposed to all the special Russian risk factors that come with it. This includes fear of (potential) shareholders, that economic value disappears and is funneld past common shareholders. This risk appears limited to me since management/founders are considerable company shareholders and the company pays high dividends to its shareholders (below). In addition, a program was approved in May to buy back up to 5% of share capital and is ‘on track’. These result in high tangible shareholder returns. A double-digit dividend yield (14.5%) if offered.

Globaltrans operates an asset-heavy business model with high capital (re)investments for both maintaining and growing its fleet of rail cars. Currently, many investors prefer asset-light businesses for the obvious possibility to grow cheaper or with much less capital invest. But the capital intensive model combined with long-term client contracts can be a defensive feature against competitors. Its more efficient operational platform acts as a (small) moat against competition. Another important question seems to be the demand side for the business.

  1. a growing economy is a positive factor
    • a high share of big clients should partially protect GLTR during downturns
      • concentration of big clients results in other risks (more below)
  2. better infrastructure could make alternatives more attractive vs rail freight
    • but also ignite higher economic growth in general (see 1), and
    • probabaly limited to specific goods/routes
      • Russia is vast, high share of bulk and oil-related goods
  3. China* may be a strong positive long-term factor for Globaltrans with
    • its hunger for commodities result in higher demand for Russian goods (1)
    • better economic integration (see Gazprom’s Power of Siberia), especially w/
    • China is #1 (USA 2nd, Russia 3rd) when it comes to rail freight volumes

*Damodaran warns if anybody says and there is China and probabaly for a god reason!

According to its recent H1 results (p7ff), Globaltrans outperformed weak Russian industry trends during uprecedented economic conditions during a global pandemic on metrics as freight rail turnover, transportation volumes. The company was even able to grow its bulk freight rail turnover in coal (+24%) and construction materials (+57%), with the former representing a potential segment for long-term decline (climate) but the latter a could strongly profit from state sponsored infrastructure programmes – especially during economic crisis as currently evoked by covid. Financial results seem rahter solid for current economic conditions. (Globaltrans upgraded to ruAA+, outlook stable)

Based on 2020 markets data, overall Russian freight rail turnover is down -2% yoy and indicates a strong recovery in H2 after a serious market decline (-5.3% yoy) in H1. Actually, further data** confirms a good market recovery in H2 2020 with very healthy trends troughout December 2020 (below). December news are reassuring and confirmed final dividend target for H2 (RUB 5bn or RUB28 per share after RUB46 per half-year). More granular data (below) shows different trends for

  • volumes (only positive months with +0.3% yoy were Oct & Dec)
  • oil (products) had a worse H2 vs H1 with 2020 volumes down -10% yoy
    • recovery only with end of pandemic/vaccination and flights?
    • H1 net revenues from oil/products were more stable (-1% yoy) then H1 net revenues overall (-18%), potentially due to longer-term contracts
      • which could act as a buffer in H2
  • construction volumes were strong in H2 and up 4.2% yoy in 2020
** modified downloadable excel file from company website

The December news elaborated on renewed and new service contracts. The MKK contract was extended by two years thus GLTR will continue to service 70% of MKK’s freight rail volumes to the end of September 2024. Metalloinvest’s contract was extended by one year only and service volumes reduced to 50% down from 70%. Other contracts were secured and GLTR continued to develop and diversify its customer base. So a few big clients (6) offer some protection during economic downturns but they represent a concentration risk.

Expansion (capex) is currently not on the schedule, so that cash can (only) be payed out as dividends. But if and when economic conditions improve, cash could again be deployed to profitably growing its fleet and creating longterm value (and deferring tax payments).

I am inclined to buy a small portfolio position (2%). Toghether with my other Russia investments (Gazprom, Sberbank) this would result in less than 10% of my portfolio value. A number I still feel comfortable with. An important question remains and the answer is not entirely clear yet:

  • Is Globaltrans a better long-term buy than (one of) my existing portfolio companies?

I hope you enjoyed my quicky about Globaltrans. What’s your take?

Addendum: Total shareholder returns are not great or even negative over the very long-term. This indicates that it matters when you buy into GLTR. Addendum-addendum: Since the stock (GRD) only began its secondary listing in Moscow in October 2020, I simply used the USD denominated London listing for total return calculations. But, this includes the ruble depreciation over recent years! It highlights the emerging markets /FX risk involved, but it obviously skewes historical total realized returns. You have to make up your own mind with regard to the current RUB valuation, but I think chances are good for a current undervaluation (i.e. Bigmac index if you believe in such data-points, investor sentiment).


My initial understanding was that Globaltrans owns rail tracks which could potentially provide the company with a strong moat. This is not the case.

Further reads

Shareholders

extract from GLTR H1 2020 Results, p27

Assets

Globaltrans claims to own a Total Fleet of 72.4k rail cars with a moderate average age (11.9 yrs) with minimum scrappage requirements. Compared to much longer useful asset lifes, according to a JP Morgan study, this indicates indeed a good asset quality. (depending on specific car type, asset use and maintenance)

  • The good quality / young age of its fleet should result in
    • maintenance capex < PPE depreciation, which is not consistently the case
    • (capex being dependend on prices, i.e. especially wheel pairs)
      • FY 2018: in mRUB
        • maintenance capex: 3,520
        • depreciation: 5,110
      • FY 2019:
        • maintenance capex: 6,908
        • depreciation: 5,794
      • H1 2019:
        • maintenance capex: 2,844
        • depreciation: 2,753
      • H1 2020:
        • maintenance capex: 2,396
        • depreciation: 3,324

Data

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