Novorossiysk Commercial Sea Port

Transcription

1 MARKETING MATERIAL RUSSIAN EQUITY RESEARCH: TRANSPORTATION Novorossiysk Commercial Sea Port INITIATION OF COVERAGE HOLD 10% Upside 2 April 2009 Analyst: NADEZDA TIMOKHOVA timohova_n@metropol.ru Telephone: +7 (495) Sales Moscow: +7 (495) Research Moscow: +7 (495) Sales & Trading London: +44 (207) Initiating coverage of NCSP with a Hold recommendation We are initiating coverage of Novorossiysk Commercial Sea Port (NCSP) with a Hold recommendation. Based on a DCF model, we estimate a fair value of USD 4.69 per GDR for end-2009, implying 10% upside. NCSP comprises the six largest stevedoring and port services companies in the port of Novorossiysk on the Black Sea. The company also operates on the Baltic Sea in the port of Baltiysk. In 1H 08 NCSP had over 20% market share in Russia for the handling of grain, sugar, ferrous metals and oil. We look for revenues to fall by 8% y-o-y in 2009 due to falling cargo handling volumes We estimate that in 9M 08 over 60% of NCSP s revenues, or USD 314mn, was generated from cargo handling. In the current poor economic climate, we expect the volume of cargo handled by NCSP to fall by 2% y-o-y in 2009 to 79.8mn tons. However, in 2H 08 the Federal Tariff Service increased tariffs for several of NCSP s stevedoring services and hence we forecast NCSP s revenues from cargo handling to grow by a slight 2.6% y-o-y in 2009 to USD 465mn, up from USD 453mn estimated for At the same time, we look for revenues from bunkering services in 2009, which made up almost 20% of total revenues in 9M 08, to fall by 55% y-o-y on the back of the decline in oil prices. NCSP s bond with a 17.7% YTM provides an alternative to investing in the company's equity Although we currently do not recommend investors buy NCSP s stock, we consider the company s Eurobond, which currently offers a 17.7% YTM, to present a better investment opportunity. We forecast that NCSP would generate USD 95mn in free cash flow in 2009, rising to USD 304mn in 2012, meaning that we expect the company should be able to meet its debt repayments. We note that at the end of 9M 08, NCSP s net debt/equity stood at 0.6x, and its net debt/ebitda was 1.3x. These ratios are not high in our view. Furthermore, only 6% or USD 33mn of NCSP s borrowings are due in Although all of NCSP s borrowings are currently USD denominated, more than 80% of NCSP s revenues are also USD denominated, as it is the currency used for regulated tariffs on cargo handling and related services. This mitigates the currency risk to NCSP in our view. Bloomberg NCSP LI / NMTP RU Rating Hold Fair value (Comm.), USD 0.06 Current price (Comm.), USD 0.06 Fair value (Comm.), RUB 2.15 Current price (Comm.), RUB 1.95 Fair value (GDR), USD 4.69 Current price (GDR), USD 4.25 Market cap, USD mn 1,091 EV, USD mn 1,492 Common shares per GDR 75 Common shares outstanding, mn 19, Week high (GDR): Week low (GDR): 2.60 Free float % 19.4% Average daily traded volume, USD mn 0.5 Share price performance over the last: 1 month 13.33% 3 months % 12 months % E 2009E Gross debt, USD mn Net debt, USD mn Net debt / Equity (x) Net debt / EBITDA, (x) Interest coverage, (x) Source: Company data, IFC Metropol estimates Summary Valuation and Financials Revenues, USD mn EBITDA, USD mn EBITDA margin, % Net profit, USD mn P/E (x) EV/EBITDA (x) EV/Revenues (x) % E % E % E % FOR PROFESSIONAL INVESTORS ONLY This report must be read with the disclaimer, disclosure and analyst certifications on the last page

2 2 Table of Contents Summary and investment conclusions...3 Risks...4 Background...5 Tariff regulation...6 Company overview...7 Shareholder structure...12 NCSP investment program...13 Recent results M 09 operating results M 08 IFRS consolidated unaudited financial results...17 Income statement...17 Balance sheet...18 Financial outlook...19 Income statement...19 Balance sheet...22 Cash flow statement...23 Valuation...23 DCF valuation...23 Peer group comparison...25 Appendix April 2009

3 3 Summary and investment conclusions We are initiating coverage of Novorossiysk Commercial Sea Port (NCSP) with a Hold recommendation. Based on our DCF model, we estimate a fair value of USD 4.69 per GDR for end-2009, implying 10% upside. We have also carried out a peer group multiples comparison, though we prefer a DCF valuation as the company s peers handle vastly different types of cargo, some of the companies incorporate business segments such as real-estate activities which others do not, and the companies client bases differ due to the ports geographical locations. We argue that any meaningful peer group comparison therefore becomes virtually impossible. The principal business of NCSP and its subsidiaries (referred to in this report as NCSP ) includes the handling of liquid and bulk cargo, which primarily involves stevedoring 1 and storage. NCSP and its subsidiaries also provide shipping services which include bunkering 2, ship repairs and harbor berths. We believe that, as with so many other companies, the global economic situation is likely to have a significant negative impact on NCSP s business. In 2008, NCSP handled 81.6mn tons of cargo, representing 18% of the total cargo handled by all Russian ports, and around 51% of cargo handled by Russian ports in the Southern Basin, which includes the Black Sea and the Azov Sea region. In 2008 NCSP handled 42.6mn tons of crude oil, which accounted for more than 50% of NCSP s overall cargo handled. However, we look for a slowdown in crude oil shipments in 2009 given the current low oil prices and weakened market demand. Crude oil is handled exclusively through the Sheskharis terminal in the port of Novorossiysk. The oil is delivered via a pipeline operated by Transneft. According to Reuters, Sheskharis handles approximately 25-30% of total Russian seaborne crude export. NCSP has indicated that the Sheskharis terminal is operating below its maximum theoretical capacity of approximately 55mn tons pa and has done so for some time. In 2008, for example, with the oil price up to around USD 140 per barrel, the terminal handled only 42mn tons of oil. With oil prices down sharply, it seems reasonable to argue that the terminal is operating at even lower volumes than in NCSP itself has said that it does not expect oil handling to increase going forwards. Our oil and gas analysts forecast that Russia s oil production may decline by as much as 2% y-o-y both in 2009 and 2010 to 9.6mn bpd and 9.4mn bpd respectively, due to lower oil prices, maturing fields and lower capex. This expected decrease is highly likely to weaken demand for NCSP s services, in our view. At the same time, we think that the Russian government is likely to attempt to prevent steeper production declines over the period, given that revenues from the oil and gas industry comprise a significant share in the Russian state budget. For example, in 2008 they comprised 47% or RUB 4.2trln and in 2007 they contributed 37% or RUB 2.9trln. Overall, we estimate that NCSP may face a 2% y-o-y decrease in crude oil handling volumes in 2009 to 41.7mn tons and an additional 2% y-o-y decrease in 2010 to 40.9mn tons. We also look for NCSP to handle significantly lower volumes of ferrous metals in Ferrous metals accounted for 10% or 8.5mn tons of NCSP s total goods handled in According to Russia s Federal Customs Service, exports of ferrous metals dropped by 30% y-o-y in 4Q 08 to approximately 41.2mn tons. Given the poor current economic climate, we view a decline in metals and mining production and a drop in demand for goods and services worldwide as a natural consequence of the ongoing slowdown. This is likely to damage NCSP. We have already seen evidence of industries which extensive use metals such as the automobile, construction, machinery manufacturing and mining industries being forced to cut production and postpone or even cancel capex plans. 1 Stevedoring is the process of loading and unloading cargo from vessels in a port. 2 Bunkering includes the sale and provisioning of fuel and water to vessels.

4 4 For example, in 2008 new US auto sales declined by 18% to 13mn vehicles. This is the lowest level since 1992, according to Autodata Corporation, an industry research house. Moreover, in January 2009 new light vehicle retail sales in the US dropped by 37% y-o-y to 0.7mn cars compared with more than 1mn a year ago, according to Autodata. In Europe, new passenger car sales declined by 7.8% y-o-y to 14.7mn vehicles in 2008, according to the European Automobile Manufacturers Association (ACEA). The IMF forecasts world output to decline in 2009 by % y-o-y. This compares to its estimates of growth of 3.4% y-o-y in 2008 and 5.2% y-o-y in At the same time, the world trade volume of goods and services is expected to decrease by 3-9% y-o-y in 2009, down from 4.1% y-o-y growth in 2008 and 7.2% y-o-y growth in 2007, according to the estimates of the IMF and the World Trade Organization. As a result, we see no reason why global trade volumes and Russia s external trade volume should not contract in Given the above forecasts, we estimate that NCSP s handling of ferrous metals could decrease by approximately 20% y-o-y in 2009 to 6.8mn tons. Looking ahead to 2010 we expect to see further government moves globally to provide access to credit and stimulate a recovery in world trade. Measures could include lowering interest rates further, where possible, and supporting demand for goods and services through government orders, lower taxes and providing government loans and guarantees to businesses. We note that the IMF forecasts a rebound in the global trade volume of goods and services in 2010, increasing by 3.2% y-o-y with world output rising by 3% y-o-y. Overall, we forecast the volume of cargo handled by NCSP to fall by 2% y-o-y to 80mn tons in 2009 and then grow at a 4% CAGR over , reaching 90mn tons in Our projections are considerably less optimistic than the guidance provided by NCSP s management at 112mn tons for NCSP s forecast was, though, made during the company s IPO in 2007, when the global economy was expanding. Nevertheless, we believe that NCSP s healthy debt position should aid the company in the current economic environment. At the end of September 2008, the company s net debt/equity ratio stood at 0.6x and its net debt/ebitda ratio was 1.3x. These ratios are not significant in our view. In 2007, NCSP successfully placed a USD 300mn Eurobond, with a 7% coupon. The Eurobond does not have any put or call options and redeems in May In September 2008, the Eurobond accounted for 60% of NCSP s long-term debt. A further significant portion of long-term debt is a syndicated loan of USD 117mn, which accounted for 24% of NCSP s long-term debt as of 9M 08 and has a rate of LIBOR +1.6%. NCSP s management has said that the interest rate has been hedged at 4.8% until This loan is due in July We note that only 6% of NCSP s borrowings are due in Even though all of NCSP s borrowings are currently denominated in USD, more than 80% of NCSP s revenues are generally also denominated in USD as it is the currency used for regulated tariffs for cargo handling and related services. As a result, we do not expect NCSP to suffer significantly from the RUB depreciation against the USD. Risks Faster or slower than expected tariff growth. NCSP is classified under Russian law as a monopoly as its business is virtually unique and structure is not easily replicable by other companies. As a result, many of NCSP s tariffs for stevedoring services including cargo handling are subject to regulation by the Federal Tariff Service (FTS). Tariffs for stevedoring services are changed on an irregular basis as tariffs for each type of cargo are reviewed by the FTS separately on the company s specific request. For example, the latest changes were made in April 2008 and the changes before that were in November There is no set formula or practice for determining the level of the maximum tariff rate changes. As a result the FTS may deny, challenge or adjust the requested rates. NCSP s management has said that common practice is to maintain an average tariff growth rate of 5% per year. We view this growth as modest and achievable and we have used it in our revenues forecasts. However, if the FTS allows NCSP to raise tariffs by above or below 5% pa, the company may see revenues growing at a faster or slower rate than our estimates suggest, creating upside or downside risk to our Hold recommendation. 02 April 2009

5 5 Better or worse than expected cargo handling growth. As noted above, we are pessimistic about NCSP s growth potential because we expect demand for its services to be severely impacted by the global economic slowdown. We are particularly concerned about declines in shipments of crude oil and metals and mining products. Overall we forecast a 2% y-o-y drop in 2009 to 80mn tons for total cargo handled. However, if NCSP handles more or less cargo than we expect, this would directly affect revenues and potentially lead us to underestimate or overestimate our fair value. Acquisitions. NCSP had excess cash flow of USD 36mn in 9M 08 and we estimate this could rise to USD 163mn in 2009 and USD 192mn in NCSP could potentially expand via M&A deals. We note that in 2006 NCSP acquired the company Baltic Stevedore, which operates in Kaliningrad. If NCSP decided to make further acquisitions it could drive its revenues and earnings above the levels that we have modeled. This could increase the company s valuation above our estimates. Background Russia is the largest country in the world in terms of territory. Its land area exceeds 17mn km 2, its boundaries stretch for 20,200 km and its coastline exceeds 37,600 km. According to Rosmorport, the federal port properties management company, there are three major seaport areas in Russia and more than 40 commercial seaports. The Northwest Basin, which includes the Baltic Sea, the Barents Sea and the White Sea, has approximately 19 seaports, according to the Russian Transport Ministry. The Far East Coast has 32 seaports. The Southern Basin, which includes the Black Sea and the Azov Sea region, has 12 seaports. The Southern Basin, where NCSP handles over 95% of its total cargo volume, accounted for 145mn tons of cargo or 35% of all cargo handled by Russian ports from January to November Figure 1: Cargo volumes handled in Russian ports by basin over 11M 08, mn tons Liquid cargo Dry bulk cargo Northwest Basin Southern Basin Far East Coast Source: Ministry of Transport, Association of Commercial Seaports The port of Novorossiysk was the largest port in Russia in terms of cargo volumes in It handled 81.9mn tons, or approximately 18%, of all cargo handled by Russian ports in 2007.

6 6 Figure 2: Cargo volumes for the largest Russian ports in 2007, tons mn Nakhodka Kaliningrad Tuapse Vostochny Southern Basin Northwest Basin Far East Coast Vanino 22.2 Vysotsk Murmansk KTK St. Petersburg Primorsk Novorossiysk Source: Association of Commercial Seaports, Company data Tariff regulation NCSP has a unique geographical location at the port of Novorossiysk, with monopoly access to the sea coast lines and berths. Constructing a port with the same specific characteristics would probably be unfeasible at this point for any would-be competitor. As a result, NCSP is classified as a natural monopoly under Russian law. Stevedoring tariffs, including cargo handling and related services are, as noted above, regulated by the Federal Tariff Service (FTS). The FTS sets a maximum tariff for any particular service with the minimum tariff at 35% less than this. This method is known as the maximum and minimum value. A contract can be set at any price within the range. We believe this system helps NCSP react quickly to changes in demand for services. Stevedoring services for each particular type of cargo may be changed every year at different rates. This is in contrast to the situation in the railway industry, where all tariffs are indexed simultaneously on a regular basis. For example, in 2Q 08 the tariff for handling cold-rolled coil using the indirect method 3 was increased by 19% versus the prior figure to USD 9.5 per ton. At the same time the tariff for grain handling was increased by 35% to USD 9.45 per ton on the same basis. The FTS has the power to review tariff rates, though the most common practice is for the FTS to adjust rates following an application from NCSP. To apply for a tariff increase, NCSP must outline a series of different factors involved including the cost of labor and other operational costs, allocated overheads, future related or current capital expenditure projects, cargo volumes and cash flow requirements. The company then presents its calculations associated with these factors to justify a tariff increase. The FTS may also request additional information. The FTS sets maximum tariff rates on a basis similar to cost-plus, however, there is no mandatory formula for determining the proposed maximum tariff rate. The FTS may deny, challenge or adjust requested maximum tariff rates at its discretion. We note that regulated tariffs are currently denominated in USD. 3 The indirect method of cargo handling involves placing cargo in a warehouse or storage space between unloading and loading. This compares to the direct method in which cargo is moved directly between the vessel and the relevant vehicle for land transportation. 02 April 2009

7 7 Company overview NCSP and its subsidiaries principal activities include, as we note, liquid and bulk cargo handling services as well as storage and sea vessel services including bunkering, ship repairs and docking. NCSP and its subsidiaries operate on the Black Sea at the port of Novorossiysk and on the Baltic Sea in Russia s Kaliningrad Region at the port of Baltiysk. Figure 3: Geographical location of the ports where NCSP operates (map is not to scale and used for information purposes only) Source: Company data NCSP s six companies are the largest stevedoring and port services companies at the port of Novorossiysk. The companies engage in all year round cargo operations. Figure 4: NCSP s subsidiaries and their core activities Novorossiysk Commercial Sea Port Oil, oil products, containers, general cargo, metal cargo Baltic Stevedore Containers 65.18% NSRZ Ship Repair Yard Ship repairs, metal cargo 85.68% NCSP Fleet Tug, towing and bunkering services 100% 95.22% IPP Oil, oil products, liquid fertilizers Source: Company data 91.38% 99.99% NLE Timber containers NZT Grain Terminal Grain Baltiysk, Baltic sea Novorossiysk, Black Sea The port of Novorossiysk The port of Novorossiysk, located in the Tsemesskaya Bay, is a multi-purpose, year round, deep-water port which, given its southern location, does not freeze. The port is connected to railway and road transportation networks. The above factors allow NCSP to provide continuous port services. The port of Novorossiysk is Russia s southern gateway for foreign trade. In 2007, the port was the largest of all the Black Sea-Azov Basin ports handling 81.9mn tons of cargo.

8 8 Figure 5: Cargo volumes of the largest Black Sea-Azov Basin ports in 2007, mn tons Izmail Varna Nikolayev Ilyichevsk Mariupol Tuapse Russian ports Romanian port Ukrainian ports Bulgarian port Odessa 31.4 KTK 32.6 Yuzhnyy Constantza Novorossiysk Source: Association of Commercial Seaports, Company data Moreover, in 2007 the port was the 6 th largest in Europe in terms of cargo volume, handling a similar volume to that seen in Amsterdam. Figure 6: Cargo volumes of the largest European ports in 2007, mn tons Constantza, Romania Bremen, Germany Le Havre, France Novorossiysk, Russia Amsterdam, The Netherlands Marseilles, France Hamburg, Germany 140 Antwerp, Belgium 183 Rotterdam, The Netherlands 407 Source: Company data According to NCSP s management, Novorossiysk services cargoes from the largest Russian exporters including LUKOIL, Tatneft, Sibneft, NLMK, OEMK, Severstal, EvrazHolding, Mechel, RUSAL, TNK-BP, TMK, WJ Grain, Glencore, Kazakhmys, Kazzinc and others. We note that NCSP s container terminals are also used by a number of international container lines including The Mediterranean Shipping Company S.A. (MSC), CMA CGM, Evergreen, Hapag-Lloyd, ZIM, ADMIRAL Container lines Inc. and others. The port s ability to provide year round services and its relative proximity to Europe, Africa and Asia compared to many other ports, makes it a convenient point for exporting cargo. For example, delivering containers from Southeast Asia to Moscow and other Central Russian cities through Novorossiysk takes eight days less than comparable shipments via Rotterdam, Hamburg and St. Petersburg according to NCSP management estimates. 02 April 2009

9 9 Figure 7: Cargo routes to and from the Port of Novorossiysk (this map is not to scale and is for information purposes only) St.Petersburg Moscow Russian Federation North America Rotterdam Europe Novorosiysk Kazakhstan Asia Shanghai Africa Bombay Latin America Source: Company data NCSP accounted for more than 95% of the cargo handled by the port of Novorossiysk in The majority of associated cargoes are shipped to Europe (37%), Africa (20%) and Asia (16%). The company does not disclose a breakdown of each cargo by destination, as it only handles the cargo and is not responsible for the shipping. Figure 8: Cargo routes to and from the port of Novorossiysk in % 12% 3% Europe Africa 11% 37% As ia North America 16% Latin America Australia 20% Other regions Source: Company data Most cargo is transported through the Turkish Straits, the Bosphorus and Dardanelles, which link the Black Sea and the Mediterranean Sea. The Straits are narrow and congested and the Turkish authorities are concerned that tankers carrying oil through the Straits could cause environmental damage. Turkey usually sets a minimum distance that must exist between tankers travelling through the Straits and sometimes prohibits more than one tanker passing through in either direction at one time.

10 Novorossiysk Commercial Sea Port (NCSP) is the largest stevedoring entity and also the holding company. At Novorossiysk it has three cargo-loading areas, the Sheskharis oil terminal, a technical support base and a passenger terminal. In 2007 the company shipped 72.4mn tons of cargo, of which oil represented 61%, oil products 13% and grain 8%. Containers accounted for 2% of the total cargo handled in We note that NCSP is the only facility in the port of Novorossiysk that processes crude oil. We estimate that its market share in 2008 for oil handled by all Russian ports was around 25-30%, based on Reuter s statistics. IPP is a high tech complex for handling liquid cargo, including petroleum products and liquid fertilizers. In 2007, IPP began to provide bunkering services supplying fuel, oil, water and other goods. IPP s handling capacity is approximately 5-6mn tons pa of oil products, 648,000 tons pa of bunkering fuel and approximately 1mn tons pa of the liquid fertilizer urea ammonium nitrate (UAN). IPP lies just inland from the waterfront and includes a tank farm for temporarily storing liquid cargoes. The company uses NCSP s berths for its operations. In 2007 the company handled 4.9mn tons of cargo, which comprised 77% oil products, 16% UAN liquid fertilizer and 7% bunkering fuel. Novoroslesexport (NLE) provides cargo handling, shipping and storage services for the export of timber, containerized cargo and nonferrous metals from Novorossiysk. The terminal focuses on shipments of processed timber as the tariffs offer higher margins than raw timber. In 2007 the company handled 2.6mn tons of cargo, 42% was made up from timber, 42% represented containers of approximately 90,000 TEU 4 and 16% was other types of cargo. The handling capacity of the NLE container terminal is 350,000 TEU per year. We also note that in addition to handling services, the terminal provides a variety of value-added services. These include warehousing, freight forwarding services and stevedoring of ferrous metals and perishable goods. Novorossiysk Grain Terminal (NZT) primarily ships grain. The terminal also provides storage and value-added services such as grain oiling, which reduces dust while it is handled and grain drying. Novorossiysk is located in the south of Russia, one of the country s key grain producing areas. In 2007 the Southern Federal District of Russia produced the largest proportion of grain in the country at 29% or 23.9mn tons, according to Rosstat. The neighboring Privolzhsky Federal District produced the second largest proportion, at 27%, or 22.3mn tons. NZT s port facilities, as a result, provide an important gateway for Russia s grain exports. In 2007, Russia exported approximately 14.4mn tons of grain. In August 2007 NZT completed the construction of a new grain storage and shipment terminal which is the fastest of its kind in Russia, according to NCSP. The terminal operates from NCSP s deep-water berths and can load a Panamax class 5 vessel in just 72 hours. Novorossiysk ship repair yard (NSRZ) provides ship repair services and handles metal cargo. NSRZ is the largest Russian ship repair facility on the Black Sea coast, according to the management, and also services the Russian naval fleet. In 2007 NSRZ handled 3.0mn tons of cargo, of which ferrous metals represented 85% of the total. The NCSP fleet provides tug, towing, docking and bunkering services for ships and other maritime vessels in and around the port of Novorossiysk. Its fleet consists of 68 vessels including 27 tugboats, seven bunkering vessels, a specialised fire extinguishing vessel and a fleet of small passenger and supply vessels. According to management estimates, the fleet provides approximately 95% of the tug, towing and mooring services at the port of Novorossiysk. The fleet also provides emergency services such as transferring vessels to sheltered zones, as well as cleaning and containment services for spillages of oil and other liquids. It also has services for dealing with hazardous materials and waste management TEU: Twenty-foot Equivalent Unit, a measure for containerized cargo used in intermodal transport 5 The vessel has maximum dimensions of; length meters, width 32.3 meters, draft 12 meters and can fit through the locks of the Panama Canal. Its tonnage is usually 65,000 tons 02 April 2009

11 11 Figure 9: NCSP and its subsidiaries at the port of Novorossiysk (This map is not to scale and is for information purposes only) IPP NLE NZT NCSP NSRZ Source: Company data Baltic Stevedore (BSC) operates the container, car ferry, cargo and passenger terminal for the port of Baltiysk in Kaliningrad, located between Lithuania and Poland. It also provides cargo storage and docking services. In 2007 BSC handled 61,000 TEU of containers. Figure 10: Location of Port of Baltiysk in Kaliningrad region. (This map is not to scale and is for information purposes only) Source: Company data

12 12 We note that BSC contributed less than 5% to NCSP s cargo handling volume in 2008 and accounted for less than 2% of cargo handled by operators in the Northwest Basin in the same year. In 1H 08 NCSP saw 54% market share in Russia for the handling of raw sugar. It also had over 20% market shares for the handling of grain, ferrous metals and oil, according to company estimates. Figure 11: NCSP s market share by cargo handled at Russian ports in 1H 08, breakdown by cargo type 000 tons, except containers Market share Raw sugar % Ferrous metals 4, % Grain 1, % Oil 21, % Non-ferrous metals % Containers, 000 TEU % Oil products 5, % Mineral fertilizers % Source: Company data NCSP is considered one of Russia s strategic entities and the government holds a 20% stake in the company. The Russian president would need to exclude NCSP from the list of strategic entities before any privatization or reduction in the government s holding could occur. Moreover, the president must authorize any move by the government to reorganize the company. This suggests that it is unlikely, in our view, that minority shareholders would be negatively affected going forwards as any corporate event would require presidential approval. This provides a level of protection for minority shareholders, in our view. Under current Russian law any transaction that results in an acquisition of more than 10% of the company needs to be notified to Federal Anti-monopoly Service since NCSP is considered, as we note, a natural monopoly. Shareholder structure The Russian state holds its 20% stake via the Federal Agency for Property Management (Rosimushchestvo), which is part of the Ministry of Economic Development. The only major private shareholder with a controlling stake is Kadina Ltd. Beneficiaries of Kadina Ltd. include the family members of Alexander Ponomarenko, the Chairman of the Board of Directors of NCSP, and Alexander Scorobogatko, a businessman. Other shareholders hold stakes of less than 3% in NSCP. Overall we estimate the free-float at 19.4%, or a float of USD 212mn in value terms. Figure 12: NCSP s shareholder structure 19% Kadina Limited 11% 50% Russian Federation Other shareholders 20% Free float Source: Company data 02 April 2009

13 13 NCSP does not have preferred shares. NCSP s common shares are traded on the RTS (NMTP RU) and MICEX (NMTP RX). In addition, approximately 17% of NCSP s common shares are traded on the London Stock Exchange in the form of GDRs (NCSP LI). Each GDR represents 75 common shares. NCSP s share price is also used as part of the RTS Index calculation. Dividends In recent years NCSP has paid annual dividends of approximately USD 10mn. The company intends to pay annual dividends in the future of up to USD 10mn. The company has said it plans to use operating cash flows to complete its capex program which it expects to be completed in approximately NCSP investment program Currently, NCSP is undertaking an investment program to upgrade and expand its cargo handling capacity at the port of Novorossiysk. NCSP estimates that its investment program should reach USD 700mn over Whether the company will continue with this program in the current environment remains to be seen. Between 2006 and 9M 08, NCSP invested USD 290mn in the development of IPP, NLE and NZT. IPP s liquid cargo capacity increased by approximately 30% per year to 6.6mn tons and NLE s container terminal capacity was expanded to 350,000 TEU. In the second half of 2008 NZT s grain terminal started to handle grain at its full capacity of 4mn tons per year. NCSP has scheduled approximately USD 200mn to renovate and increase its oil terminal capacity at Sheskharis by approximately 30% to 70mn tons of oil and oil products by The company also plans to expand the capacity of the BSC container terminal to 300,000 TEU by 2012, up from less than 100,000 TEU. NCSP is currently analyzing future potential demand for different types of cargo. A number of potential projects are under consideration, including the construction of a terminal to handle 4mn tons of heating oil at a cost of approximately USD 180mn. The company is also assessing a possible expansion of the capacity of the NCSP container terminal from 150,000 TEU to 2mn TEU.

14 14 Recent results 2M 09 operating results Figure 13: Volume of cargo handled, 000 tons unless otherwise stated 2M 08 2M 09 Growth, y-o-y Liquid cargo Oil 6,493 7, % Oil products 1,679 2, % Liquid fertilizers % Seed oils % Total liquid cargo 8,317 9, % % of total 69% 71% Dry bulk cargo Grain 481 1, % Raw sugar % Mineral fertilizers and other chemicals % Cement % Raw iron ore and iron ore concentrate % Scrap metal % Total dry bulk cargo 1,029 2, % % of total 9% 15% General cargo Ferrous metals 1,554 1, % Timber products % Non-ferrous metals % Pig iron % Perishables % Other % Total general cargo 1,973 1, % % of total 16% 12% Containers Containers (by weight) % Containers (per 000 TEUs) % Total containers % % of total 6% 2% Total for all types of cargo 12,070 13, % Source: Company data In 2M 09 NCSP handled 13.7mn tons of cargo, an increase of 1.7mn tons, or 13.8% y-oy on 2M 08 volumes. Growth was driven largely by capacity expansions launched in 2008 for the handling of grain and oil products, as described earlier. Liquid cargo NCSP s handling of liquid cargo, which comprised more than 70% of the company s overall cargo turnover in 2M 09, rose by 17.7% y-o-y to 9.8mn tons. Crude oil has historically made up the largest contribution to NCSP s volume of cargo handled. In 2M 09, crude oil accounted for 55% of the total volume of cargo handled by the company. This compares to proportions of 56% and 52% for 2007 and 2008 respectively. Oil is handled solely through the Sheskharis terminal via a pipeline owned and operated by Transneft, the Russian state-owned pipeline company. NCSP s management estimates that the Sheskharis oil terminal currently operates at approximately 40-45mn tons pa. This is below its maximum theoretical capacity of approximately 55mn tons pa. NCSP s management does not expect handling of oil to increase going forwards. Moreover, as noted earlier, the congested Turkish Straits are probably unable to accommodate increased shipping traffic in the foreseeable future. In addition, the construction of the Baltic Pipeline System II (BPS II) is due to be completed by The pipeline is planned to deliver 50 70mn tons pa of Russian oil 02 April 2009

15 15 from the pumping station at Unecha on the Belarusian border, to the port of Primorsk on the Gulf of Finland, which may reduce demand for NCSP s oil handling services. As we mentioned earlier, our oil and gas analysts forecast that Russia s oil production could decline by as much as 2% y-o-y in 2009 and by an additional 2% y-o-y in In spite of this, we argue that the Russian government is likely to attempt to ward off steeper production declines over the period given that revenues from the oil and gas industry comprise a significant share in Russia s state budget. For example, in 2008 they comprised 47% or RUB 4.2trln and in 2007 they accounted for 37% or RUB 2.9trln. Taking into account that Sheskharis handles approximately 25-30% of total Russian seaborne crude export, we think that it is likely that handling of crude oil by NCSP would decrease in 2009 by 2% y-o-y to 42mn tons and by a further 2% y-o-y in 2010 to 41mn tons, in line with our expectations for the overall industry trend. The company s handles oil products at IPP and the Sheskharis terminal. NCSP estimates that its capacity for handling oil products is limited to approximately 12mn tons pa. In 2008 the facility was working at full capacity and NCSP has advised that capacity to handle an additional 1mn tons of oil products has already been contracted. As can be seen from the figure above handling of oil products increased by 40% y-o-y to 2.2mn tons in 2M 09. We project throughput of 12mn tons pa for oil products in 2009 and further ahead. Dry bulk cargo Dry bulk cargo, accounting for 15% of NCSP s overall cargo handled, increased in 2M 09 by 95% y-o-y to 2mn tons. Handling of grain represented 58%, or 1.2mn tons, of dry bulk cargo handled by NCSP in 2M 09. At the end of 2007 the Russian government introduced an export duty on grain in an attempt to offset growing consumer prices for bread and flour. NCSP consequently saw in 1H 08 a 52% y-o-y drop in grain cargo turnover to 1mn tons. However, the company was able to partially offset the decline by attracting transit shipments of grain from Kazakhstan. For the full year 2008, grain handling showed growth of 8.8% y-o-y reaching 6.3mn tons, which, according to NCSP, is a record high figure. Over 5.3mn tons, or 83% of the 2008 total, was handled in 2H 08 when the export duty on grain was cancelled. At this point, the Novorossiysk Grain Terminal reached full capacity. For the July 2007 to June 2008 season, the Russian grain crop totaled 108mn tons, the highest figure in the preceding 15 years. According to the Minister of Agriculture, around 23mn tons should be exported between July 2008 and June The Federal Customs Service estimates that approximately 10.6mn tons of grain has already been exported between July 2008 and December We also note that the Institute for Agricultural Market Studies (IKAR) forecasts production of grain crops to reach 85-96mn tons in 2009, with higher grain volumes seen only in the years 1992, 1993 and Given that NCSP s overall grain handling capacity is around 7mn tons pa and the company estimates that it is not able to significantly boost capacity, in our model we assume that grain handling should remain around 7mn tons pa in 2009 and further ahead. General cargo General cargo handling, which represented 12% of overall cargo handled in 2M 09, decreased by 16% y-o-y to 1.6mn tons over this period. Among general types of cargo, ferrous metals accounted for more than 75% in 2M 09. The volume of ferrous metals handled by NCSP dropped by 20% y-o-y from 1.5mn tons to 1.2mn tons in 2M 09. Metals and steel products, including ferrous and non-ferrous metals, scrap metal and pig iron comprised 1.5mn tons or 11% of the total cargo handled in The handling of metals and mining products decreased by 14.2% y-o-y in 2M 09. As argued above, we expect the global economic slowdown should lead to a contraction in world trade volumes in We have already commented on how industries which extensively use metals and mining products have particularly suffered from the drop in demand for goods and services. For example, car sales in Europe in 2008 declined by 7.8% y-o-y while total car sales for GM, Chrysler and Ford in the US dropped by 21.5% y-o-y over the same period. We estimate that the handling of metals and steel products by NCSP could fall by approximately 20% y-o-y in 2009 to 7.7mn tons. It is possible that the global economy may begin to recover in 2010 due to government stimulation packages such as infrastructure projects and tax cuts aimed at boosting demand. These measures, designed to ease the recent credit tightening and encourage

16 business lending, might in turn lead to an increase in demand for goods and hence raise NCSP s cargo volumes. We also note that Russia is due to host the XXII Winter Olympic Games and the XI Winter Paralympic Games in Sochi in Sochi is one of Russia s largest tourist destinations, stretching 147 km along the Black Sea coast. The Russian government and private businesses plan to invest more than USD 12bn by 2013 into the construction of hotels, stadiums and sporting facilities, roads and other related infrastructure and services. The port of Novorossiysk is located 200km from Sochi. In our view this proximity may increase demand for port handling facilities as the construction of infrastructure projects for the Games may require the import of goods using delivery by sea. Currently only a few projects have been contracted with developers and we expect the main construction processes to begin in Given the uncertainty over what impact the Olympic Games may have on NCSP s cargo handling volume we do not model the company seeing any additional volumes resulting from the Games. However, should the planned infrastructure projects require delivery of imported goods via the port of Novorossiysk, we believe that NCSP would be a likely beneficiary of this higher demand. Container traffic The majority of goods with high added value, i.e. consumer electronics, machinery, spare car parts, clothes and others are transported in containers. In 2M 09 NCSP handled 36,000 TEU of containerized cargo, or a 33% y-o-y decline. As a result, the proportion of this type of cargo in NCSP s overall turnover decreased from 6% in 2M 08 to 2% in 2M 09. Currently, the world s largest exporters and importers, namely Germany, China, the USA, Japan and France are experiencing either a slowdown in real GDP growth or a contraction in overall GDP. For example, in 4Q 08 real GDP fell by 12.7% y-o-y in Japan, by 6.2% y-o-y in USA, by 1.7% y-o-y in Germany and by 1.0% y-o-y in France. In the Eurozone, real GDP shrunk by 1.2% y-o-y in 4Q 08. Moreover, import and export volumes in many countries have also started to decrease. For example, in 4Q 08 exports dropped by 13.9% q-o-q in Japan and by 7.3% q-o-q in Germany. In France, the volumes of exports and imports declined by 3.7% q-o-q and 2.2% q-o-q respectively. In our view, these figures all indicate that currently international trade is falling. Our opinion therefore is that the volume of container cargo is very likely to decrease in We note that AXS-Alphaliner, a shipping industry consultant, estimates that idle ocean container capacity reached a record high of 800,000 TEU in February 2009 as carriers cut services on key East-West routes due to declining traffic and freight rates. The idle figure represents 303 ships or 6.5% of the world fleet, according to AXS- Alphaliner. For comparison, there were just 70 ships without work at the end of October Furthermore, according to the news agency Sea News, capacity on the Far East - Europe trade route in February 2009 dropped by 21% to 333,000 TEU from 418,000 TEU at the end of October On the Far East - North American route trade fell by 9% compared to October 2008 from 376,000 TEU to 335,000 TEU and on the Europe/Mediterranean - North American route it dropped by 4.5% from 121,500 TEU to 116,000 TEU. In our forecast for NCSP s container traffic for 2009 we modeled a 20% y-o-y decrease to 305,000 TEU. The IMF expects to see a rebound in the global trade volume of goods and services in 2010 and hence we model volumes of container cargo growing that year April 2009

17 17 9M 08 IFRS consolidated unaudited financial results Income statement Figure 14: 9M 08 IFRS consolidated unaudited financial results, USD mn 9M 07 9M 08 Growth, y-o-y Revenues % Stevedoring services % Fleet services % Other % Operating expenses before depreciation (190.3) (224.4) 18% Fuel % Payroll % Other expenses % EBITDA % EBITDA margin 43% 54% 11.3% Depreciation % Operating expenses including depreciation (224.1) (315.1) 41% Operating profit (EBIT) % Operating margin 32% 35% 2.9% Other income % Finance cost (33.9) (29.0) -14% Foreign exchange gain 26.6 (15.2) -157% Other expenses, net (5.3) (0.8) -84% Excess of Group's interest in net assets acquired over consideration paid on acquisition of subsidiaries % Profit before income tax % Income tax (25.0) (25.1) 0% Effective tax rate 25.1% 19.1% -24% Profit for the year % Net profit margin 22% 22% -0.6% EPS, USD % Source: Company data NCSP s revenues increased by 47% y-o-y to USD 488mn over 9M 08, driven primarily by 56% y-o-y growth in stevedoring services. Over 90% or USD 440mn of NCSP s revenues in 9M 08 was generated by stevedoring services. There were several factors behind the rapid growth in stevedoring services in 9M 08. Firstly, expanded capacity allowed NCSP to increase handling of containers, oil products and grain. The company estimates that this capacity expansion alone enabled NCSP to increase its revenues by USD 50.6mn over the January to September 2008 period. Secondly, NCSP expanded the range of services offered at the port, which mainly included expediting of cargo, cargo storage, container loading and other services. The company estimates that revenues from this source were USD 40.8mn for 9M 08. Thirdly, NCSP continued to increase the proportion of high-margin cargo such as containers, petroleum products and grain. NCSP estimates that a higher proportion of high-margin cargo between January and September 2008 contributed USD 31.8mn to the company s revenues. We further note that in 2Q 08 the FTS increased tariffs for several stevedoring services by 10-35% which, in turn, supported revenues growth for NCSP. However, due to a lack of detailed information we cannot accurately evaluate to what extent revenues grew as a result of the increase in tariffs. We also note that NCSP includes bunkering services into its calculation of revenues from stevedoring services. It is important to understand that revenues from bunkering services are almost directly linked to fuel costs, part of operating expenses, as NCSP purchases fuel to provide bunkering services to clients.

18 18 Figure 15: NCSP s operating expenses breakdown, USD mn % % % % Fuel Payroll % % % % Depreciation Other expenses 9M 07, total operating expenses USD 224mn 9M 08, total operating expenses USD 315mn Source: Company data As we can see from the figure above fuel costs, which include fuel purchased by NCSP for resale, accounted for 24% of NCSP s operating expenses in 9M 08. We note that fuel costs rose by 51% y-o-y in 9M 08 due to a surge in oil prices, reaching almost USD 140 per barrel in June We estimate that NCSP resells more than 90% of the fuel it buys. NCSP does not disclose the mark-up on fuel, but we consider this be in the range of only 5-10% due to the high level of competition. This suggests revenues from bunkering services of USD 85-90mn or 17% of NCSP s total revenues for 9M 08 in our view. This may seem a significant proportion of total revenues, however, we note that revenues from bunkering services can be volatile due to changes in the oil price. We believe that fuel costs and revenues from bunkering services are almost directly linked as an increase in bunkering services involves higher fuel costs. As a result, we estimate that the net effect on operating profit should be small. Depreciation represented the largest individual cost in 9M 08, accounting for 29% of operating expenses. Depreciation grew by 168% y-o-y in 9M 08, as NCSP changed its accounting estimates by decreasing the life of a series of assets. No further details were disclosed, but NCSP s management estimates that going forwards depreciation charges should be higher than in 2007, but lower than in Given this, we expect depreciation to be in the range of USD mn annually over Staff costs accounted for 21% of NCSP s operating expenses in 9M 08, showing 12% y- o-y growth to USD 66mn as the company decreased headcount by 5% to approximately 7,400 while, at the same time, it increased salaries. As the port becomes increasingly mechanized, NCSP seeks to optimize staff levels through natural attrition wherever possible. As a result, NCSP s operating profit increased by 60% y-o-y and reached USD 173mn in 9M 08. The EBIT and EBITDA margins improved to 35% and 54% respectively in 9M 08. However, a foreign exchange gain of USD 27mn seen in 9M 07 became a USD 15mn loss in 9M 08 due to the RUB depreciation against the USD. As a result, NCSP s net profit increased by only 43% y-o-y to USD 106mn in 9M 08. This compares to 60% y-o-y growth in operating profit over the same period. The net margin for 9M 08 was almost unchanged at 22%. Balance sheet In our view, NCSP s balance sheet is in good shape. At the end of September 2008, its net debt/equity stood at 0.6x, and its net debt/ebitda was 1.3x. These ratios are not significant in our view. 02 April 2009

19 19 Financial outlook Income statement Our detailed outlook for NCSP s profit and loss account can be found in the Appendix of this report. Revenues As noted, over 90% of NCSP s revenues as of 9M 08, or USD 440mn, were generated through stevedoring services. We estimate that approximately 9%, or USD 41mn, of this figure was attributed to additional services. These are supplementary services which include checking, tracing and expediting cargoes to adhere to a progress schedule, cargo storage and container loading and unloading. A further 19%, or USD 85mn, was generated from bunkering and the remaining 72%, or USD 314mn, was attributed to stevedoring services. As discussed above, we expect that the volume of cargo handled by NCSP could fall in 2009 by 2% y-o-y to 79.8mn tons. However, we project that an expected increase in world trade volumes may allow NCSP to increase cargo handling by approximately 4% pa over Figure 16: Volume of cargo handled ( 000 tons, except where stated) E 2010E 2011E 2012E Oil 44,289 42,592 41,740 40,905 40,905 40,905 Oil products 9,237 11,208 12,000 12,000 12,000 12,000 Ferrous metals 8,073 8,520 6,816 7,838 9,014 8,520 Grain 5,808 6,317 7,000 7,000 7,000 7,000 Raw sugar 1,901 1,655 1,700 1,700 1,700 1,700 Containers 3,656 5,338 4,267 5,880 7,840 11,200 Containers ( 000 TEUs) Other cargo 6,434 6,003 6,279 7,963 8,287 9,179 Total 79,398 81,633 79,803 83,287 86,746 90,504 Growth, y-o-y -2% 3% -2% 4% 4% 4% Source: Company data, IFC Metropol estimates As noted, tariff changes for stevedoring services are irregular and there is no mandatory formula for amending rates, though common practice sees a 5% pa average tariff increase. This growth is modest and achievable in our view and we have used it in our revenues forecast. The management aims to increase revenues from supplementary services by 5-7% going forwards, but in our view this looks unlikely to happen in We expect that the global economic slowdown may decrease demand for supplementary services as cargo owners cut costs. This said, customers should still need such supplementary services. The associated costs are low with storing of perishables in NCSP s refrigeration units costing just USD 0.35 per ton per day, while storage of cold-rolled coil in a covered warehouse costs just USD per ton per day. Overall, for the sake of conservativeness, we expect 3% y-o-y growth in 2009 in revenues from additional services and 5% y-o-y growth starting from Bunkering provides the third major revenues component and, as discussed above, is in our view almost directly related to oil prices. For forecasting bunkering services we have first applied our oil and gas analysts estimates for the oil price over our forecast period and then factored in our expectations of a 2% drop in the volume of cargo handled by NCSP in 2009, followed by a 4% y-o-y increase in each year over We forecast average oil prices of USD 45 per bbl in 2009, USD 50 per bbl in 2010, USD 56 per bbl in 2011 and USD 61 per bbl in This compares to USD 70 per bbl in 2007 and USD 95 per bbl in As a result, we estimate that revenues from bunkering should drop by 56% y-o-y in 2009 to USD 48mn and reach USD 73mn in 2012.