Brazilian Transportation Company Rumo S.A. Will Deliver Corn, Soybeans And Up To 5.7% Yield

| About: Rumo SA (RUMOF)

Summary

Rumo S.A. is one of the largest transportation companies in Brazil, it has concessions for c. 12 thousand km of railroads and transports over 40 bn ton miles of commodities.

Its debut 2024 maturing eurobond was issued this year and currently yields 5.7%. It is BB- rated and has prospects for improvement.

The Company grows rapidly as well as goes through active deleveraging. By the end of 2017 its Net Debt/EBITDA is expected to be closer to 3.3x, by 2018 - 3.0x.

Rumo S.A. (formerly ALL – América Latina Logística S.A.) is a Brazilian transportation company, primarily engaged in transportation of soybeans and corn as well as fuels, sugar and containers. The company is traded on the São Paulo stock exchange under the ticker RUMO3 (also - RUMOF) and is headquartered in the city of Curitiba, State of Paraná, Brazil. The company operates railroads under concession rights that expire between years 2026 and 2028, which is beyond our investment horizon. Company owns most of its rolling stock.

The largest shareholder of Rumo S.A. is Cosan Ltd., which owns 28.37% of its capital. Cosan Ltd. is a Brazilian conglomerate focusing on energy, biofuels and sugar production; its market cap is $2.5 bn.

Investment characteristics:

Instrument type

Fixed Income

Level of risk

High-Yield (“Non-Investment Grade Speculative”)

Industry

Logistics & Transportation

Investment horizon

Medium (until 2024)

Strategy

Buy and hold to maturity

Characteristics of fixed income securities:

Issuer, CUSIP

Curr.

Rank

Coupon

Amount outst.

Pricing date

Maturity

YTM / mdur.

YTW / mdur.

Last price

Rumo Lux SARL, AM3916666

USD

Sr Uns’d

8.375%
S/A

$750
mn

02 Feb 2017

09 Feb 2024

5.7% /
4.9

5.4% /
3.5

108.2

Source: Bloomberg Terminal

Company financials forecast

Please refer to table 1 for actual and forecasted financial parameters. High revenue growth is a result of higher number of contracts for transportation of commodities and investment into additional rolling stock.

Table 1. Rumo SA financials forecast

Indicator

FY2016

FY2017F

FY2018F

Revenue, $ mn

1,245 (-1.5%)

1,810 (+45%)

2,046 (+13%)

EBITDA, $ mn

457 (+51.3%)

840 (+84%)

985 (+17%)

EBITDA margin, %

36.7%

46.4%

48.2%

Net income, $ mn

-305 (16% better)

-44 (6.9 x better)

153 (turn pos.)

Net Income margin, %

-24.5%

-2.4%

7.5%

FCF, $ mn

-75

-347

-109

Net Debt

2,687

2,804

2,910

Cash

362

1,140

460

Net Debt / EBITDA

5.5x

3.3x

3.0x

Source: Rumo S.A. filings, Bloomberg Terminal, Lighthouse Research

Investment thesis:

1. Stable market positions and high growth

Rumo S.A. is the sole railroad transportation operator in the South and Mid-Western regions of Brazil, areas which benefit a lot from high demand for grains worldwide. While Rumo faced some performance volatility between late 2014 and early 2016, its long-term fundamentals remain strong. Rumo operates under 4 concessions that expire after 2026, which is beyond maturity of Notes in 2024. See figure 1.

Figure 1. Map of Rumo S.A. operations

http://ir.rumolog.com/fck_temp/2_16/file/v6-enu-perfil.png

Source: Rumo S.A.

Overall macroeconomic conditions in Brazil demonstrate significant recovery after slowdown in 2014-2015 (see Figure 2 below).

Figure 2. Macro conditions in Brazil and forecast for 2017-2019

Source: Bloomberg Terminal, Bloomberg Consensus Forecast, compiled by Lighthouse Research

2. Stable credit metrics and liquidity

As a result of SPO held in October 2017 (+16.4% of shares) Rumo saw inflow of c. BRL 2.6 bn ($780 mn), which makes current liquidity equal to c. BRL 4.3 bn ($1.3 bn). By the end of the year we expect company’s cash on hands will decrease to to $1.1 bn. The company has confirmed that the proceeds will be used for debt repayment. Following the SPO, Rumo’s leverage should improve from 3.3x to 5.5x, a year earlier. As a result, S&P improved Rumo’s rating one notch to BB-. Although the changes moved the price of bond up (see figure 3) by c. 4% since August, the bond is still underperforming. In our opinion, the bond has a room for further growth after 4Q results are published.

Company has enough liquidity to fund its negative FCF of over BRL 710 mn in 2017 and BRL 460 mn in 2018 as well as to amortize the debt maturing in 4Q2017, 2018 and 2019 (for BRL 1.3 bn, BRL 1.8 bn and BRL 1.3 bn, respectively).

Figure 3. Price dynamics of Rumo 2024 Notes

Source: Bloomberg Terminal

Table 2. Credit ratings

Entity

Rumo SA

Rumo Luxembourg Sarl

Agency

Outlook

LT Foreign Rating

2024 Notes

2024 Notes recovery

S&P

Stable (6 Oct 2017)

BB- (16 Aug 2017)

BB- (16 Aug 2017)

4 (45%) (2 Feb 2017)

Fitch

Positive (21 Jun 2017)

BB- (7 Dec 2009)

BB- (9 Feb 2017)

-

Source: S&P, Fitch, Bloomberg Terminal

3. Limited FX risks

  • Despite revenues are denominated in BRL, large share of Rumo's CAPEX program requires USD investment (capital equipment purchase)
  • As reported in its financial reports, Rumo SA hedges most of its FX debt exposure via derivative instruments
  • Less than 20% of its total debt (2024 Notes and minor bank loans) is denominated in USD
  • Positive macroeconomic trends in Brazil as well as favorable FX forecast for next 2-3 years are among other positive factors (see figure 2)

Risks

Extensive CAPEX program and negative FCF

  • Rumo had negative FCF over recent years, which, as a result, made the company to increase its leverage and to turn to shareholders for additional funding in 2016 and 2017
  • Rumo’s CAPEX program for 2016 – 2018 will require over BRL 3.0 ($1 bn) investment in new infrastructure and rolling stock (30% of average yearly revenue). This will make keep FCF negative by at least end of 2018
  • Prolonged period of negative FCF and slower EBITDA growth may lead to new round of leveraging and pressure on bonds
  • If Brazilian economy continues to recover as forecasted, we expect FCF to turn positive by 2019

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Disclosure: I am/we are long RUMOF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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