Aton – NCSP: Profitable Haven - Apr 29, 2010

In this note we revise upward our fair value for Novorossiysk Commercial Sea Port (NCSP) to incorporate the company’s FY09 IFRS results, released on 22 Apr, and recent growth in the Russian stevedoring sector. For example, in 1Q10 the sector managed to expand 11% YoY in total physical cargo volumes, with increases being reported in all Russia’s port regions. Some of the profitable cargo types such as containers grew +52.3% YoY on import deliveries and +39.5% YoY on exports in 1Q10.
(To view the full report please click here:

 
http://russianreports.aiidatapro.com/AtonEN/29_04_2010_NCSP_Profitable_Haven.pdf)

 
Bottom line

 
In addition to factoring the group’s FY09 IFRS figures into our forecasts, we have also revised our WACC estimates following our strategy team’s reduction of Aton’s countryspecific risk premium. We have additionally lowered our company beta to reflect the infrastructural nature of NCSP’s business and therefore low dependence on cyclical volatility. NCSP’s FY09 results clearly demonstrated that even during the 2009 crisis year the port increased its physical cargo turnover by 6% YoY, exceeding the pre-crisis levels in absolute terms. As a result, we have decreased the company’s WACC from the previously used 13.7% to the current 12.0%. As a consequence of these adjustments, our 12M fair value for NCSP increases by 16% to $18.56 per GDR from $16.02 previously. Our new 12M fair value offers over 30% upside potential and hence we reiterate our BUY rating on the stock.

 
FY09 results

 
NCSP’s IFRS results for FY09 were below our expectations (see Figure 1), but nonetheless demonstrated a solid operational and financial performance. Despite the Russian economy’s contraction in 2009 the company increased its revenues 3% YoY alongside 6% growth in total cargo turnover. The Russian rouble’s depreciation against the US dollar over 2009 also pushed NCSP’s margins to a record high of 64%, as dollardenominated tariffs helped to keep revenues stable, while rouble-denominated costs decreased in dollar terms. However, with the rouble continuing its appreciation in 2010 and high port capacity utilisation rates already achieved in 2009, we have decided to lower our previously published financial and operational forecasts for NCSP as presented in Figure 2.

 
Valuation

 
Adjustments to Model Assumptions

 
In revising our NCSP model assumptions we have taken into consideration the latest stevedoring industry developments, such as the +11% YoY physical turnover growth achieved in 1Q10 in all Russian seaports. We also considered an observed recovery in personal consumption and an unfreezing of capital expenditure in Russian corporate budgets on the back of a stronger rouble.

 
This has found expression in growth rates for import container traffic reaching +52.3% YoY in 1Q10. Nevertheless we kept in mind the below-expectations FY09 NCSP results and management comments from the 2009 results conference call. In light of the above we summarise the changes made to our forecasts as follows:

 
- A degree of re-balancing of the port cargo mix following management comments

 
- Flatter growth of physical cargo turnover on the back of management expectations

 
- More conservative expectations with respect to stevedoring tariffs growth

 
- Higher capex in light of revised management expectations and key project completion guidance

 
- An increase in the EBITDA margin due to a stable and well-controlled cost base as anticipated by NCSP management

 
DCF Model Assumptions

 
Furthermore, we have recalculated our WACC estimate following our strategy team’s lowering of our Aton country-specific equity risk premium from 4.2% to 3.7%. The deflation was made in reaction to Russia’s CDS spreads contraction. We have also lowered the company’s beta from 1.18 to 1.03 to reflect our updated appraisal of the cyclical volatility of NCSP’s business. Consequently, our WACC has been reduced from 13.7% to 12.0%, with all other inputs unchanged.

 
International Valuation Comparison

 
A comparison of NCSP’s key valuation multiplies with international sector peers indicates that the company trades with around a 25-45% discount to its peers on P/E and EV/EBITDA ratios for 2010E-12E. We have used our estimates for NCSP and Bloomberg consensus figures for the company’s peers. We believe that such high discounts to its peers fully support our BUY rating for the stock derived from our DCF valuation exercise. Aton OOO (LLC) 27 Pokrovka str., bld.6, 105062 Moscow Russia (495) 777-66-77 (495) 228-38-99 aton-line@aton-line.ru www.aton.ru http://aton.ru Source: Aton (BK/AB/BK)