Tag: Rail Transport

Poste Italiane targets logistics growth with rail JV

Poste Italiane, the Italian postal group, is aiming to expand in the logistics sector with the formation of a joint venture with Italian Railways (Ferrovie dello Stato/FS).

The two groups announced they will merge their small logistics businesses, SDA Logistica (Poste Italiane) and Omnia Logistica (FS), into a single company to be called Italia Logistica. This will initially have revenues of some EUR 70 million, putting it among the top ten Italian logistics companies, according to the two groups. They hope it will grow into a market leader by 2010.

SDA Logistica, founded in 2000, is currently a unit of SDA Express Courier, Poste Italiane’s express and parcels delivery subsidiary, and uses its operational network of 96 depots, six distribution hubs and two air gateways. SDA Express Courier, with some 3,100 staff, had revenues of EUR 460 million in 2007.

Italia Logistica will focus on offering long-distance intermodal freight transportation using both rail and road, combined with door-to-door delivery services. It will use the two groups’ acceptance and distribution facilities. Additional services will include return logistics and hotel/catering logistics.

Poste Italiane director general Massimo Sarmi said that the two groups were combining their logistics and technological experience in order to create a national logistics operator able to compete with the leading European players.

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Inside Freight: Takeaways from STB Hearings on Cost of Capital

STB HEARINGS. Yesterday, the STB held public hearings on the Board’s previously announced proposal to revise its calculation of the rail industry’s cost of capital (CoC). The hearings lasted 4 hours and included testimony from the U.S. Class I rails, the DOT and FRA, industry lawyers, lobbyists, and private investors.

BACKGROUND: In August, the STB proposed switching to a CAPM calculation for the cost of equity vs. the existing DCF methodology. For ’05, this would imply a 7.5% CoC vs. 12.2% using a DCF. This is important because a lower CoC implies a lower revenue adequacy threshold for the rails in STB rate cases. Using the current DCF method allows the railroads a higher CoC and thus higher rail rates. Switching to a CAPM and a lower CoC implies relatively lower future rail rates.

KEY TAKEAWAYS: (1) The hearings focused on the merits of CAPM vs. DCF or a combination of the two; (2) Speakers also debated the proposed inputs (specifically the market risk premium) and many argued for a higher cost of equity and implied CoC; (3) BNI and UNP noted a CoC in the low double-digits, while KSU argued for a higher company-specific CoC rather than being subject to the industry avg. of the Big 4 U.S. rails; and (4) The Board seems likely to review the merits of historic vs. replacement costs.

FINAL DECISION LIKELY SEVERAL MONTHS AWAY. Based on comments from the Board members yesterday, it seems like the STB may now favor a CoC based on a combination of the CAPM and DCF calculations. At the end of the day, we expect the STB to arrive at a CoC somewhere between the current DCF and the proposed CAPM numbers. We do not expect a final decision for several months.

REGULATORY NOISE LIKELY TO CONTINUE. While there were positive developments for the rails yesterday, we expect continued noise from the STB and Congress in ’08. Combined with ongoing macro concerns, our sense is the rail stocks could face continued pressure, and we would recommend buying the group on pullbacks.

INVESTMENT CONCLUSION: All things considered, yesterday’s STB hearings were likely more positive for the railroads than we anticipated. Based on the hearings we now expect some form of upward revisions to the final cost of capital adopted by the STB (likely somewhere between the current DCF and the proposed CAPM calculations highlighted in Exhibit 1). However, with likely changes to the original proposals, we believe a final STB decision is now likely several months away. As a point of reference, the STB issued its final decision on simplified rate case procedures this September, nearly nine months after holding public hearings on its proposals. Also coming out of yesterday, we now strongly believe the STB will examine historic versus replacement costs which would be a clear positive for the rails. However, the timing or potential ruling on this issue remains very uncertain given the difficulty in calculating a fair “replacement” value for a railroad.

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CTL Logistics acquired by Bridgepoint

CTL Logistics, Central and Eastern Europe’s leading private rail logistics company and one of the largest private rail operators in Europe, has been acquired from its founder, Jaroslaw Pawluk, by Bridgepoint for an undisclosed sum.

Founded in 1992, CTL is organised around four core activities – rail transportation, freight forwarding, siding management and waste disposal – with a specific focus on coal and coke, fuels and oil, chemicals, construction materials and steel.

The company provides full service, tailor-made logistics solutions through its own asset base. This includes sidings with 660km of operated siding tracks, 176 locomotives, 4,828 wagons as well as strategically located terminals for land and water transport. It has over 2,500 employees and in 2006 had revenues of PLN 974 million (€249 million).

The rail freight market is a growing part of the land freight industry in Europe where annual growth rates in volume and value are predicted to exceed 4% and 5% per annum respectively for the next five years. Private new entrants, such as CTL, are gaining market share as they continue to invest in their infrastructure and are forecast to continue growing faster than the segment. The Polish rail freight market itself is the second largest in Europe thanks to the country’s dominant market position in coal production and its strategic position as an East-West rail corridor.

Khai Tan, partner responsible for Bridgepoint’s investment activities in Central and Eastern Europe, said that CTL had achieved growth rates in excess of its competitors and with further investment from Bridgepoint would be ready for further international growth, already evident in its successful non-stop cross-border service between Poland and Germany and its geographic footprint which covers some of the densest freight corridors in Europe.

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Canadian Pacific Railway (US) (CP-$70.46-Peer Perform). What a Difference a Year Makes

GWR, Reports before the market, call at 11:00AM, (888) 428-4479

Canadian Pacific Railway (US) (CP-$70.46-Peer Perform)

What a Difference a Year Makes

• UPSIDE REPORT. Yesterday evening, CP reported 3Q continuing EPS of C$1.23, above both Cons. of $1.18 and our $1.17. Rev., EBIT and EPS grew by 3%, 8% and 14%, mostly decelerated from 7%, 9% and 12% growth during 2Q. Results were a bit worse on an operating basis as CP benefited by $0.02 from a lower tax rate and from a 1-time labor settlement gain which was not yet quantified.

• REPORTED YIELDS TURN NEGATIVE. Total yields declined 3.7% y-o-y, well below our +0.3% estimate and down from +2.2% last qtr. Yields were negative at CP for the 1st time since 1Q:04, although we suspect most of this is related to mix and the weaker US dollar. Total vols increased 6.2% and margins improved 110bp y-o-y including the impact from the 1-time labor benefit.

• CP GUIDES TO LOW END OF EPS RANGE. CP now expects C07 EPS at the low end of its unchanged C$4.30-$4.45 range. Despite -2.2% vols in C06, CP grew EPS by 20% last year and beat its original EPS guidance by C$0.10. However, this year with vols tracking up 3% YTD, CP is reducing guidance to the low-end of its initial range and forecasting only 9% EPS growth. Despite stronger vols, CP is suffering with slower yield growth and fewer productivity gains. What a difference a year makes.

• LOWERING OUR EPS ESTIMATES. We are lowering our 4Q:07 estimate by 7% to C$1.21, vs. prior Consensus of C$1.28. Our C07 estimate of C$4.33 is now in-line with CP’s lowered expectations. We are also lowering our C08 estimate by 4% to C$4.90, and we are now below prior Consensus of C$4.94. We expect the weak U.S. dollar to continue to be a drag on reported rev. and EPS.

• INVESTOR WORKSHOP TODAY. CP will host its earnings conf. call later this morning, followed by its analyst day presentations in the afternoon. Earlier this morning, CP guided to C08 EPS of C$4.70-$4.85, which at the midpoint is 3% below prior Consensus and 2%-3% below our downwardly revised estimate from last night. We will revisit our model following today’s meetings.

INVESTMENT CONCLUSION: CP is currently trading at 14.8x and 7.3x our downwardly revised U.S. dollar EPS and EV/EBITDAR estimates. This compares with its 1, 3, and 5-year averages of 15.3x, 14.3x and 13.5x and 8.6x, 7.7x and 7.3x. This is also roughly in-line with our Large Cap Rail Index excluding CP, which is currently trading at 15.0x and 7.3x.

We continue to be impressed with CP’s ability to grow volumes this year when the other rails have not been able to do so. We also remain impressed with management’s continued evolution to a culture of cost improvement. That said, EPS growth has slowed this year despite increased volume growth and into reduced productivity measures (speed, dwell, etc.). We expect continued pressure on CP’s earnings over the intermediate term from 1) the relatively weak U.S. dollar, 2) contractual down y-o-y Elk Valley coal pricing during C08 and early C09, and 3) the likely ramp-up of its build-in to the Powder River Basin at some point towards the end of C08 or C09. At current high end historical valuations and facing these EPS headwinds, we remain on the sidelines with a Peer Perform rating.

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Rail tickets from designated post offices

Indian Railways and the Department of Posts on Tuesday signed an agreement to allow the sale of reserved tickets through post offices spread across the country.

The Memorandum of Understating was signed by A.K. Goyal, Additional Member (Commercial), Railway Board, and S. Samant, Chief General Manager, Department of Posts in the presence of Railway Minister Lalu Prasad and Minister of Communication and Information Technology A. Raja at Rail Bhavan.

Mr. Prasad said this was the joint endeavour of his Ministry and the Ministry of Communications and IT for the benefit of the people, especially for those living in remote areas.

Mr. Prasad said that in future the facility of issuing e-tickets would also be provided at mutually agreed locations.

He said that in the first phase, reserved tickets would be available at: Phulbani (Orissa); Deoghar (Jharkhand); Auraiya (Uttar Pradesh); Anjaw (Arunachal Pradesh); Bishnupur (Manipur); Champhai (Mizoram); Mangaldoi (Assam); Jowai (Meghalaya); Senapati (Manipur); Udaipur (Tripura); Yingkiong, Daporijo, Bomdila & Along (Arunachal Pradesh); Doda and Poonch (Jammu and Kashmir); Panchkula (Haryana); Sundergarh (Orissa); Madras High Court (Tamil Nadu); Ahwa (Gujarat); Noida Sector 56 P.O. (Uttar Pradesh); Udyog Vihar P.O. Gurgaon (Haryana); Dahisar, Mumbai (Maharashtra); Sriperumbudur (Tamil Nadu); Pushkar (Rajasthan); DLF Gurgaon (Haryana); Dwarka Sector-6 (Delhi); Greater Noida Alpha (Uttar Pradesh); Indirapuram, Shipra Sun city, Noida (Uttar Pradesh); Kavinagar, Ghaziabad (Uttar Pradesh).

The Department of Posts will realise service charge from the passengers in lieu of issuing tickets.

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