New Investment – Global trans

Just bought some Global Trans (GLTR.L) – 2.5% portfolio weight (I tweeted about it the other day) this is quite a nice little Russian investment.  They basically operate railway freight in Russia.  This is not without it’s risk.  But yield is very high – c16% in 2018, 2019 dividend of $1.45 (half paid already). PE is low – c5.4 for 2019.  It isn’t either that this is a company on the brink of bankruptcy either – net debt to EBITDA is c0.53 – RUB denominated, and the company has lots of railway freight assets – book value is c$4.7 per share vs a share price of c$8.7.

There are some risks.  In Russia there is a risk of expropriation – but not much is done at zero value and Global trans was largely built up as a private asset.  It can be expropriated by stealth if the Federal tariff service puts up the regulated tariff rate to an uneconomic level.  Many contracts are on a pass through basis – mitigating this risk. The underlying assets can likely not be moved to other countries due to the gauge of Russian railways – they are wider.  So it would be difficult to move them elsewhere – not impossible depending on exact specifications – Russia has 1.52m gauge vs 1.435m in Europe. In the past Russian businesses have been seized due to tax investigations – the rate paid looks OK to me – c20% so similar to the statutory rate.  Their 3 biggest clients are 50% of revenue, but long term contracts were 60% of revenue – providing some protection.  P12 of the annual report is interesting – it suggests c50% of their revenue will expire off long term contracts in the next two years.  This is both a risk and an opportunity.

The Interim results are a mixed picture, lower volumes at higher prices resulting in higher revenues and profits.  The EBIT margin was 35%.  There has been consistent growth over the years not reflected in the share price.  The share price is about half what it was in 2012 but earnings in USD are about the same.  Revenue has halved in USD but the amount of rail freight KM per ton has more than doubled!  It reminds me of an quote from Joseph Stalin – “Quantity has a quality all of its own”.  The Rouble may be undervalued – if it is, then this and Russian stocks in general are even more undervalued.  The market as a whole in Russia is very cheap – the PE is c6. I am relatively new to investing in emerging markets / dealing with this level of FX volatility. The rouble/USD rate went from c30 in 2012 to c65 now.  I believe looking at physical characteristics such as freight per KM/ Ton is the way to analyse this – the companies it is dealing with are those such as metal, coal and ore which are internationally traded in the long run I would expect cost of transportation to reflect these costs.

This is largely due to sanctions – another risk – some GDRs of companies linked to certain people were suspended. In lots of ways I would prefer to hold this via a Russian broker rather than a GDR.

The Russian economy generally is doing better than many think – middling inflation, low debt to GDP, growth isn’t what it could be but it appears to me the society is stabilizing and will improve – though there is a high level of household debt.  Good articles on this are here and here and here.

In terms of ownership – somewhat unusually for a Russian company this is reasonably dispersed, 42.9% is owned by insiders / founders.  But this is 5 people so it isn’t a monolithic block dedicated to fleecing me.  They are billionaires / oligarchs so this is relatively small fry to them.  Hopefully it will discourage them from stealing it.  Their other ventures have partners who would be watching – and I hope it wouldn’t be worth it for the value on offer here.

Total management salary was 3% of revenue ex pass through and it isn’t well disclosed – this is in the annual report as “key management compensation”.  It may differ from what is usually in there and include more operational roles.  I am not too worried as long as dividends continue to get paid.

Catalysts for a rerating include – change of sentiment toward Russia – likely via stabilization in Ukraine.  Greater investor awareness – with this sort of valuation / yield in a world of negative interest rates people may be tempted to take the risk.  It is also possible that the group that own 42% may decide to buy the rest. Even if nothing happens at an ongoing 10%+ yield I am content to wait.

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