Russia's NefteTransService to IPO in London

By bne IntelliNews January 18, 2013

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Kicking off the Russian IPO drive for 2013 is Russian rail freight company NefteTransService (NTS), with an announcement on January 15 confirming its intention to list on the London Stock Exchange in the first half of this year. Financial details have still to be settled, but NTS is expected to sell a stake of around 25% in a business with an estimated market value of around $2bn.

Reforms to Russia's rail sector are in the vanguard of the Kremlin drive to make over the country's infrastructure, and the separation of the commercial (freight) part from the subsidised part is a key element in the reforms.

NTS is a leading private freight rail operator with operations in Russia and Kazakhstan, and will list NTS Holding PLC as GDRs on London's main market. The company has already applied to the London authorities for permission and expects the IPO to happen in the first half of this year.

The company said in a press release that it intended to use the proceeds of the offer to expand its fleet of rolling stock, "primarily by purchasing rolling stock from other market participants, leasing rolling stock under finance leases and acquiring other freight rail operators, should attractive opportunities arise."

"Once listed, NTS intends to reinvest profits into the business. However, over time, the Company's goal is to declare and pay dividends broadly consistent with market practice," the company said, tapping into the general trend of increasing dividend payments amongst Russian companies in 2012 that produced some of the best performing shares on the domestic market.

JP Morgan, Morgan Stanley and Renaissance Capital are acting as joint global coordinators and joint book runners, the company said.

Founded by four entrepreneurs in 2006, Alexander Tertychny, NTS's CEO and one of the founding shareholders, said in the release: "The offering comes on the back of six years of rapid growth, during which time we have managed to build one of the largest private rail fleets in Russia with more than 60,000 rail cars.

At the same time, we believe the potential for continued profitable growth remains substantial. Funds raised from the IPO will strengthen further our position as a leading player and active consolidator of the industry."

Russia's freight sector has now reached the same stage of development that its supermarket sector reached in the middle of the last decade: following the fall of the Soviet Union, both sectors were highly fragmented with thousands of stores becoming privately owned by individuals.

However, as business grew market leaders emerged and began to consolidate the sector. In the supermarket business that process is well advanced, but in freight it is only just beginning. Today, there are a handful of larger freight operators and thousands of small companies, some owning a mere handful of wagons. The game is to raise money and grab as much market share as you can.

As its name suggests, NTS built up its business by moving oil about ("Neft" is Russian for oil), but in recent years it has expanded into other raw materials such as iron and manganese ore, ferrous metals, coal and building materials.

NTS is the second largest rail freight company in Russia in terms of volumes transported, and third in terms of fleet size with 57,332 units of rolling stock as of the start of November of which just over a third is on lease from other companies. but this is still only enough to give the company a 7.9% market share of total freight turnover in 2011 (similar to supermarkets where the biggest operator still only has about a 14% market share).

Business is booming in a country where 85% of all goods are transported by rail. The company's fleet size was almost doubling every year between 2009 and 2011, while revenues were increasing by half again over the same period, although the global crisis impacted the business last year. The company earned RUB33.7bn ($1.1bn) of revenue in the nine months 2012 with an Ebitda of RUB13.5bn ($450m), increases of 23% and 53% respectively on the same period in 2011.

The company takes an opportunistic approach to growth. In some cases it buys cheap old tank railcars that are nearing the end of their useful life and refits them to get a few more years of service. Meanwhile, it recently acquired the in-house transport company EvrazTrans that previously belonged to steel major Evraz, one of the world's biggest steel producers.

"The future of the sector is consolidation," Tertychny told bne in an interview at the end of last year. "The owners of the smaller companies want to sell and the growth will come from better management and improving efficiency. We are a dedicated freight company and results-orientated. And we are growing faster than any other player in the market."

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