With this note we increase our DCF-based 12M target price for NCSP’s GDRs from $12.00 to $12.25 and reiterate our BUY rating. We argue that NCSP is currently unfairly undervalued by the market. Our positive view on the company is supported not only by its fundamentals, but also by the government’s plans to privatise its 20% stake in NCSP, which may lead to a positive rerating of the stock.
Value-accretive changes in investment programme from new management. A new strategy has already been developed and we expect it to be presented to the public in the next few months. The main difference between the old and new approaches is a shift from large-scale construction contracts to the continuous development of existing facilities coupled with the streamlining of production processes. This should allow the same objectives to be reached at lower capital cost, and the alignment of new capacity additions with actual demand. Given that Russian cargo flow growth in ports was feeble in 2011, the new strategy should add flexibility to the company’s business and improve NCSP’s competitive advantages over the ports of neighbouring countries.
Privatisation may lead to an upward rerating of the stock… The government owns 20% of NCSP directly and 5% through Russian Railways (RZD). Lately, the state has appeared eager to finance its budget deficit through the privatisation of its many stakes in listed and non-listed corporations. We think that the upcoming privatisation of the government-owned stake in NCSP (likely in 2012) will be positive for the stock.
… as competition for the asset is likely to materialise. Firstly, we expect Summa Holding, which already effectively holds 25% of NCSP’s capital, to take part in the privatisation auction as it is actively expanding its stevedoring business. As we understand, for now Summa is not incentivised to increase shareholder value, as that would effectively inflate what Summa would need to bid for the stake. However, if Summa wins the auction and consolidates control in the company, in our view, it would be interested in increasing the port’s capitalisation via improved transparency and corporate governance standards. Secondly, we believe that in addition to current shareholders there may be foreign stevedoring companies that wish to establish a foothold in Russia through strategic cooperation. Based on this potential interest, we assert that the auction price is likely to exceed the current market price by 20-30%, on our estimates (based on comparable peers’ valuation ratios). This, in our view, may lead to an upward rerating of the stock.
Liquid cargo volumes are becoming more volatile but the port has significant opportunities to unlock growth in other segments. The absence of growth in crude oil extraction and increasing domestic demand for oil products led to a 4% YoY decrease in liquid cargo flows in Russian ports in 2011. NCSP’s FY11 results look more solid as it managed to load almost the same oil volume as in 2010. However, we see growth opportunities for NCSP in other cargo types, like grain, iron ore and containers, and we believe that management will pursue this goal. We highlight that in addition to the good defensive profile of the company, on our estimates, NCSP may offer a solid long-term revenue CAGR of 8% in 2011-16E.
Dividends are unlikely to be encouraging, but we do not believe the sale of treasury shares will create any overhang. NCSP currently has 2.68% of its own shares on its balance sheet. Management sees these shares as a means to increase liquidity and plans to monetise them in the near future. Management is price sensitive and is not willing to let the shares go at a low price (current prices are deemed to be low), and as such we do not expect a one-time sale to the market. At the same time FY11 dividends are likely to be low, in our view, given the company’s rather high leverage.
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