Russia's United Wagon Company to float in Moscow

By bne IntelliNews April 17, 2015

bne IntelliNews -


Russian railcar producer United Wagon Company (UWC) is set to IPO on the Moscow Exchange at the end of April, becoming the country's first initial public offering of 2015.

The company, which has implemented an ambitious modernisation programme, will float at least 10% of its shares, of which around 5% will be sold by controlling shareholder ICT Group, a holding company for oligarch Aleksander Nesis.

“Today we are one of the largest and most advanced transport engineering companies in Europe,” UWC chief executive Roman Savushkin said in a press release.We are the national leader in building innovative railcars, which, thanks to their substantial economic benefits, are in increasing demand in the railway market and are steadily replacing production of old railcars in Russia and across the 1520mm gauge area,” he added.

In 2014, UWC generated consolidated IFRS revenue of RUB 17bn ($337mn), a five-fold increase on 2013. EBITDA grew to RUB3.5bn in 2014, compared to RUB 1.4bn in the previous year. The EBITDA margin in 2014 was approximately 21%.

The IPO will be Russia's first IPO since supermarket chain Lenta's successful IPO in March 2014. Russian IPOs have generally done badly in recent years, raising the hurdles for UWC to carry out a successful offering.

Over the last eight years, all but six of the 87 Russian IPOs have lost money, and the 10 worst are all down by over 90%, a bne IntelliNews analysis found.  Following Lenta's IPO of March 2014, the company's stock is trading at a 30% loss. Additionally, investors may be wary of ICT, controlled by Nesis, whose IPO of Nomos Bank was seen as unsuccessful by the market.

Modern player

United Wagon Company's key asset is the Tikhvin Freight Car Building Plant (TVSZ), located in Tikhvin in the Leningrad region. It contains 20 super-efficient production lines that use over 100 robots, which wouldn’t look out of place on a production line in Dusseldorf or Detroit. The heavy investment was a bold move, but it has paid off. “Russia has a fleet of about 1.2mn wagons, but the technology was very low. Compared to the US, Russia's rolling stock was about 70 years behind,” CEO Savushkin told bne IntelliNews in an interview earlier this month.

The wagons cost about 50% more to lease as its local competition, but the higher cost is offset by the efficiency and capacity gains that the modern wagons provide. This plant has an annual production capacity of 16,000 innovative railcars (set to increase to 22,000 by 2016) and 30,000 car-sets of foundry.

Other parts of the UWC group include NPC Springs, which produces heavy-duty rail springs for innovative bogies, the group’s own R&D centre, and a network of over 40 service depots across Russia, Kazakhstan and Belarus.

But it is not just the modern production facilities that have made the company a success. UWC adopted international best practises in corporate governance from the outset and has three independent directors on its board. “Equal treatment of all shareholders and unconditional respect for their rights and interests is the foundation of UWC’s corporate governance system,” Savushkin said in the interview, adding that the independent directors are the only members of the board on the company's Audit and Remuneration committees.

It has also developed an innovative business model that has allowed it to roll with the punches in the volatile market. “One of UWC’s key competitive advantages is its cyclical business model, which is unique among Russian companies. The financing, production and leasing elements of the cycle allow the company to easily adapt to changes in market conditions, meaning that it is able to secure predictable revenue streams, even in times of lower market demand,” Savushkin said in the interview.

Hard on the wagon

The market for wagons has been a hard one in recent years. The sector was roaring in the run-up to the 2008 crisis as freight operating companies rapidly expanded and modernised their fleets. But the financial meltdown knocked the bottom out of the business and production slumped. A recovery in 2010-2012 collapsed again in 2013-2014 as the second wave of the current crisis hit. However, because of the strong demand for UWC’s high-tech wagons, the company continues to enjoy steady demand: Russia’s monthly production volume of new wagons had fallen in early 2015 to about 2,000 units per month, but up to 1,000 of those are being made by UWC.

The industry body INFOLine estimates that between 2015 and 2022 just over a third of all the wagons operating in Russia, or about 460,000 wagons, will have to be scrapped. Set this against the annual production of new cars that is currently running at about 50,000 a year, and producers are expecting the market to turn the corner soon. “The market has been tough, but we think we are at the bottom of the cycle now – the signs of new growth are already apparent,” Savushkin said in the interview.

The Russian state has also been doing its bit to support the sector. It has been promoting the domestic production of wagons by tightening the regulations on re-certifying old wagons, which is pushing companies to invest in new rolling stock by shortening the time span that old wagons can operate before requiring new certification and modernisation.

UWC also enjoys preferential borrowing rates. The company plans to invest $250mn over the next three years, three-quarters of which will be provided by bank loans. While commercial borrowing rates have soared to over 20%, making most investment projects unaffordable, as UWC works in a strategically important sector it is eligible for state interest rate subsidies that has kept its average borrowing cost at about 10%.

“The government continues to support the sector by offering reduction in tariffs for empty runs and subsidies for the purchase of innovative wagons, which will bolster demand further,” Savushkin told bne IntelliNews.

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