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DECEMBER 10, 2018 THE RUSSIAN EAGLE – 2019 STRATEGY: STANDING AGAINST THE HEADWINDS

Transport: Mixed Outlook

KEY DEVELOPMENTS

Sector performance has varied widely this year due to a combination of macro factors and to the various segments being in different phases of the cycle.

Despite improving operating figures, Aeroflot has been the biggest loser this year due to high oil prices as well as ruble weakness, which partly owes to the changes to the fiscal rule this year. Excessive capacity expansion by Russian air carriers, which were counting on a continued recovery in passenger traffic, has prevented rising costs from being passed on to customers via higher ticket prices, causing their financials to suffer. Aeroflot’s recently unveiled strategy through 2023 showed that the company is betting on Pobeda, transit traffic and development in regions beyond Moscow and St Petersburg.

In rail transportation, cargo turnover has been dominated by minerals exports, especially metals and coal, which have posted volume growth of more than 5% y o y so far this year. This has stimulated demand in the gondola railcar market, which is still in deficit, though lease rates have plateaued at around R1,800 per railcar day. Prices for new wagons have skyrocketed, which has caused large, non specialized players, including Globaltrans, to turn cautious about buying more of them. However, captive and smaller players appear to be more optimistic about the prospects for next year.

Global Ports has outperformed the Russian container market (13% growth versus 10% y o y in TEU terms), where growth is slowing due to weaker consumer demand and, hence, imports. It has performed better in the Far East than in the Baltic region, where its ports are running far below full capacity. Meanwhile, pressure on revenues per TEU has subsided, though all cash flows are still being directed to repaying debt.

STRATEGIC VIEW

We do not see many potential triggers on the horizon that could help to crystallize value in the sector. Moreover, in light of the geopolitical risks, investors’ willingness to invest long term in individual stocks may be limited.

The recovery in the rail market is likely played out, and the deficit should soon ease, putting downward pressure on gondola lease rates. Globaltrans has not been expanding aggressively into specialized segments and looks set to remain a second tier dividend story with little debt and still strong cash flows.

We recently upgraded Aeroflot to HOLD, as we believe that the worst may be behind it. However, we are not as confident in the company’s fundamentals next year given how much idiosyncratic uncertainty there is (for example, over the implementation of IFRS 16), how weak consumer demand has been, how much spare capacity remains in the market and how unclear the outlook for oil prices is. Moreover, expectations of the seasonally weak fourth quarter, which will determine the final basis for this year’s dividends, are bleak at the moment.

TOP PICKS

█Global Ports. We believe that there is still room for the container market to grow and that the company’s intrinsic value still lies above its market value, even accounting for the stock’s illiquidity. Investor perception should change for the better if Global Ports can pick up market share faster than the competition amid the market slowdown or show further progress in the bulk and ro ro segments.

Alexey_Ryabushko@sberbank-cib.ru, Fedor_Kornachev@sberbank–cib.ru

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THE RUSSIAN EAGLE – 2019 STRATEGY: STANDING AGAINST THE HEADWINDS DECEMBER 10, 2018

Source: Bloomberg, Sberbank CIB Investment Research

Source: Bloomberg, Sberbank CIB Investment Research

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DECEMBER 10, 2018 THE RUSSIAN EAGLE – 2019 STRATEGY: STANDING AGAINST THE HEADWINDS

Global Context

Source: Bloomberg

Source: Bloomberg, Sberbank CIB Investment Research

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THE RUSSIAN EAGLE – 2019 STRATEGY: STANDING AGAINST THE HEADWINDS DECEMBER 10, 2018

Russian Macro Data

Source: CBR