Poland Share Price Performance PKP Cargo - Bankier.pl · 2014 Dec 2014 Jan 2015 PKP PW vs WIG20...

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FUNDAMENTAL INSIGHT

Poland | Logistics | 26-January-2015

PKP Cargo

AWT acquisition should add value

We maintain our BUY rating on PKPC after revising our FV to include the

highly likely acquisition of an 80% stake in AWT. Factoring in depressed

PL coal exports, intensification of rail infrastructure modernization

works, changes to the PL rail freight structure, the firm’s stricter-than-

originally assumed cost control, as well as expected positive effects from

the recently adopted voluntary leavers program (PDO), our NI estimates

for PKPC stand-alone fall by 3-7% for 2015-18E. Nevertheless, applying

revised RFRs and a cut to CAPEX assumptions means our standalone FV

rises by 6.6% to PLN 95.78. On top of that, incorporating the most

tangible (in our view) potential synergies between PKPC and AWT, we

value an 80% stake in the latter at PLN 584.6m (vs. PLN 445m agreed to

be paid by PKPC) drives our combined entity FV to PLN 98.90, which

implies 12.4% upside. Our pro-forma 2015E EV/EBITDA stands at 4.71x,

close to the avg. for European sector representatives (dominated by

higher-beta Russia-focused players). Given the size of the proposed

AWT transaction, PKPC’s solid b/sheet and potential for debt drawing,

we do not expect this deal to prevent the firm from distributing

dividends in the years ahead (15E/16E DY at 2.5%/4%).

AWT deal looks value accretive after incorporating most tangible synergies

Factoring in the expected synergies related to AWT’s rolling stock rental costs

(1/3 of 5k railcars used by AWT are rented out; likely to be gradually replaced by

PKPC’s equipment) and its maintenance (by using PKPC’s repair forces instead of

3rd

party services and parent firm’s modernized rolling stock), which we estimate

at EUR 14.1m in 2015-19E, we value an 80% stake in AWT at PLN 585m (31% above

the deal value). Due to a low visibility currently, we factor in no potential revenue

synergies on PKPC’s side linked to potential realization of freights to South Europe

or replacement of AWT’s subcontractors in CR and other markets.

Potential transaction-related risks

Among the main risks related to the AWT deal we highlight an acceleration in the

decline of hard coal consumption in the CR and a material fall in lignite usage in

CZ’s energy generation mix going forward, as well as close cooperation between

AWT with NWR, dealing with liquidity issues (contracts with NWR account for

roughly 40% of AWT’s annual revenues at present). PKPC would also face the risk

of entering a foreign market, although the fact that the CZ entity Minezit will stay

as AWT’s minority shareholder (20% stake) largely limits this risk in our view.

Standalone PKPC earnings on the rise despite increasingly difficult market

While we cut freight turnover and unitary service price estimates for PKPC by 5-

8% and 2-5%, respectively, for 2014-18E, factoring in the firm’s stricter-than-

originally assumed cost control and additional savings forecast from the recently

adopted PDO (PLN 155m already in 2015E), we still expect the firm’s NI to show a

healthy increase to PLN 316m in 2015E (up c.7% y/y when 2014E result is adjusted

for one-off headcount costs in 4Q14E) and to PLN 404m in 2016E (up 28% y/y).

Trading at relatively undemanding multiple on pro-forma basis

On a 2015E pro-forma EV/EBITDA of 4.71x, PKPC would trade at 10% premium to

European peers and a 54% discount to N.American peers. We see the premium as

justified given PKPC’s dominant position in PL and likely upside from foreign

expansion after the proposed AWT, decent earnings outlook, as well as a strong

b/sheet, allowing for dividend distribution despite the recent M&A plans.

BUY 12% upside

Fair Value PLN 98.90

Bloomberg ticker PKP PW

Share Price PLN 88.00

Market Capitalisation PLN 3,941.25m

Free Float 62%

PLN m Y/E 31-Dec 2013A 2014E 2015E 2016E

Revenue 4,797.5 4,250.4 4,238.4 4,477.8

Operating expenses 4,687.3 4,188.9 3,841.3 3,969.9

EBITDA 499.0 435.7 823.8 974.3

EBIT 110.2 61.5 397.1 507.9

Net Income 74.0 49.8 315.7 403.7

PKP Cargo stand-alone (ex AWT)

Y/E 31-Dec 2013A 2014E 2015E 2016E

EV / EBITDA (x) 6.98 9.20 4.75 3.91

Recurrent P/E (x) 51.5 78.5 12.5 9.8

Dividend yield (%) 0.0% 3.5% 2.5% 4.0%

Intrerest coverage ratio 13.8 17.1 33.9 41.4

PKP Cargo stand-alone (ex AWT)

All share price data as at close on 22-Jan-2015

Source: BESI Research, Company Data, Bloomberg

75

80

85

90

95

100

105

Feb 2014

Mar 2014

Apr 2014

May 2014

Jun 2014

Jul 2014

Aug 2014

Sep 2014

Oct 2014

Nov 2014

Dec 2014

Jan 2015

PKP PW vs WIG20 Index

Share Price Performance

Analysts Cezary Bernatek +48 22 347 4079 [email protected] Banco Espírito Santo de Investimento, S.A. – Warsaw Branch Poland 59 Zlota Street, 00-120 Warsaw

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Source: Company data, BESI Research for estimates, Bloomberg Due to a lack of sufficient data, we were unable to compile full pro-forma financial statements for the combined entity. To drive the combined organisation’s FV, we added our

estimated FV of a 80% stake in AWT to our estimated FV of PKP Cargo standalone (see page 18 of the report).

Valuation Metrics (Year end Dec) 2011 2012 2013 2014E 2015E 2016E

Rating BUY EV / EBITDA (x) n.a. n.a. 6.98 9.20 4.75 3.91

Fair Value* (PLN): 98.90 Recurrent P/E (x) n.a. n.a. 51.5 78.5 12.5 9.8

*including AWT likely acquisit ion EV / EBIT (x) n.a. n.a. 31.6 65.1 9.8 7.5

88.00 Dividend yield (%) 0.0% 0.0% 0.0% 3.5% 2.5% 4.0%

12.4% P/BV (x) n.a. n.a. 1.1 1.2 1.1 1.0

89.86

10.1% Key Ratios 2011 2012 2013 2014E 2015E 2016E

PKP PW EBITDA margin 16.6% 14.8% 10.4% 10.3% 19.4% 21.8%

PKPP.WA EBIT margin 7.5% 6.6% 2.3% 1.4% 9.4% 11.3%

Net debt-to-total assets 0.02 0.00 -0.06 0.02 -0.01 -0.02

Net debt-to-equity 0.03 -0.01 -0.09 0.03 -0.01 -0.03

44.79 Net debt-to-EBITDA 0.09 -0.03 -0.66 0.23 -0.04 -0.14

3,941 Interest coverage ratio 34.4 18.0 13.8 17.1 33.9 41.4(331)

62 ROE 15.1% 8.6% 2.2% 1.4% 8.9% 10.7%

3,672 ROA 8.3% 4.9% 1.3% 0.9% 5.8% 7.1%

Key Drivers 2011 2012 2013 2014E 2015E 2016E

4Q14 financial results release March-2015 Freight turnover (in m tkm) 33,962 29,567 30,085 28,642 29,260 30,486

Freight volume (in m t) 130.5 116.7 114.4 110.4 111.7 114.9

Average haul (in km) 260.3 253.3 262.9 259.3 261.2 264.0

Average service price per 1tkm (PLN) 0.159 0.171 0.151 0.145 0.141 0.143

Average operating cost per 1tkm (PLN) 0.152 0.163 0.156 0.146 0.131 0.130

Cezary Bernatek

+48 22 347 40 79

P&L Summary (PLN m, unless stated) 2011 2012 2013 2014E 2015E 2016E

Revenue 5,577 5,173 4,797 4,250 4,238 4,478

% change -7.2% -7.3% -11.4% -0.3% 5.6%

Operating expenses (5,159) (4,829) (4,687) (4,189) (3,841) (3,970)

% change -6.4% -2.9% -10.6% -8.3% 3.3%

EBITDA 928 767 499 436 824 974

% change -17.3% -34.9% -12.7% 89.1% 18.3%

EBIT 418 344 110 62 397 508

% change -17.6% -68.0% -44.1% 545.2% 27.9%

Net Financial Result (49) 16 (10) (2) (5) (7)

Share in profit of associates (0) (0) (13) 0 0 0

Extraordinary items 0 (6) 2 0 0 0

Pre-Tax Profit 368 353 89 59 392 501

Income Tax Expense 43 (86) (23) (8) (75) (95)

Minority Interests (0) 0 9 (2) (2) (2)

Net Income 411 268 74 50 316 404

% change -34.9% -72.3% -32.7% 533.6% 27.9%

% margin 7.4% 5.2% 1.5% 1.2% 7.4% 9.0%

Reported EPS (PLN) n.a. n.a. 1.71 1.12 7.05 9.01

DPS (PLN) 0.00 0.00 0.00 3.07 2.23 3.52

Shares in Issue (e-o-p m) 2.9 2.9 43.3 44.8 44.8 44.8

Cash Flow Summary (PLN m) 2011 2012 2013 2014E 2015E 2016E

Cash flow from operations 866 781 700 319 755 862

Cash flow from investment (1,112) (668) (371) (220) (514) (593)

Cash flow from financing (71) (70) (253) (149) (146) (195)

Change in borrowing 199 29 (203) (15) (35) (30)

Dividends paid 0 0 0 (138) (100) (158)

Other, net (270) (99) (50) 3 (11) (7)

Net Cash Flow (317) 44 76 (51) 95 74

Balance Sheet Summary (PLN m) 2011 2012 2013 2014E 2015E 2016E

Cash and cash equivalents 710 847 955 510 605 679

Tangible Fixed Assets 3,496 3,807 3,855 4,069 4,157 4,284

Trade receivables and other 693 613 609 541 540 577

Other Assets 471 357 324 282 276 275

Total Assets 5,370 5,624 5,744 5,403 5,578 5,815

Interest Bearing Debt & Financial Leasing 798 827 624 609 574 544

Trade Liabilities 801 682 676 582 581 607

Other Liabilities 781 900 935 789 783 775

Total Liabilit ies 2,380 2,409 2,235 1,980 1,937 1,926

Shareholders' Equity 2,915 3,143 3,447 3,359 3,575 3,821

Minority Interests 75 72 62 64 66 68

Total Equity 2,990 3,215 3,509 3,423 3,641 3,889

Net debt 87 (20) (331) 98 (31) (135)

PKP Cargo (stand-alone , except for FV)

Previous Fair Value (PLN):

% change to fair value

Share Price (22/01/2015, PLN):

Upside / Downside potential

Bloomberg

Reuters

Shares in Issue (Less Treasury)(m)

Market Cap (PLN m)2013 Net Debt (PLN m)

Adjustments for Associates & Minorities (PLN m)

Enterprise Value (PLN m)

Freight turnover evolution (in m tkm)

Forthcoming Catalysts

Equity Research Analyst

[email protected]

Revenues, Net Income&Net Margin (in PLN m)

EBITDA, EBIT & EBIT margin (in PLN m)

5,577

5,173

4,797

4,250 4,2384,478

4,705

4,697

411268

74 50316 404 462 383

7.4%

5.2%

1.5%1.2%

7.4%

9.0% 9.8%

8.2%

0%

2%

4%

6%

8%

10%

12%

0

1,000

2,000

3,000

4,000

5,000

6,000

2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Sales consolidated Net income Net income margin

418

344

11062

397

508

576

477

928

767

499 436

824

9741,089

1,040

7.5%

6.6%

2.3%1.4%

9.4%

11.3%

12.2%

10.2%

0%

2%

4%

6%

8%

10%

12%

14%

0

200

400

600

800

1,000

1,200

2011 2012 2013 2014E 2015E 2016E 2017E 2018E

EBIT EBITDA EBIT margin

12,157 11,38413,301 11,932 11,753 11,690 11,445 11,205

10,069

6,4995,540

6,218 6,512 7,344 8,475 8,334

4,037

3,8434,365

3,617 3,7983,977

3,991 3,965

2,318

2,1341,676

1,923 1,9321,942

1,942 1,942

33,962

29,567 30,08528,642 29,260

30,48631,652 31,410

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Coal Aggregates&con. mat. Ores & metals

Chemicals Liquid fuels Timber & agro

Intermodal Other TOTAL

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PKP Cargo stand-alone – forecast changes

We cut our forecasts for PKPC’s freight turnover by 5-8% for 2014-18E and now

expect it to show only a minor 2.2% y/y pick-up to 29.3bn tkm in 2015E

following a 4.8% y/y decline to 28.6bn in 2014E (implying 7.55bn tkm for

4Q14E), and before a 4.2%/3.8% increase to 30.5bn/31.6bn tkm in 16E/17E

(mostly driven by a forecast increase in the aggregates & construction materials

segment). This was mainly in answer to: i) the recent heavily depressed exports

of Polish coal (down 42% y/y in 3Q14) and our expectations for no major

turnaround in this respect in the short run, as well as a general ‘crisis’ in the

Polish coal industry, which seems to be lasting longer than previously expected;

ii) visible domestic freight disturbances (causing a need to find alternative

arrangements and affecting average trading speed), linked to intensification of

rail infrastructure modernization works, expected to continue in 2015 (c. PLN

10bn planned for investment in 2015, up from c. PLN 7bn spent in 2014,

according to PKP PLK); iii) the recent changes to the rail freight structure in

Poland, affecting the firm’s average trading haul, especially in ores & metals, as

well as timber & agro segments; and finally iv) slightly weakened GDP growth

prospects for Poland for the years ahead (current GDP growth consensus (BBG)

for 2015 at 3.1-3.3%, down from 3.3-3.5% half year ago).

Moreover, tough competition in the PL rail freight market seems to pose

stronger-than-previously anticipated pressure on PKPC’s unitary service price

(down 2.8% y/y to PLN 0.1470 in 9M14, versus the 2.0% y/y fall we originally

expected for 2014), which leads us to cut our estimates here by 2-5% for 2014-

18E. Combined with the changes applied to freight turnover assumptions, this

means that our top line forecasts for the firm are down by 8-12% for 2014-18E.

However, factoring in the firm’s stricter-than-originally assumed cost control

almost across all main operating lines (especially in infrastructure access, fuel

and headcount areas), as well as additional cost savings forecast to come from

the recently adopted PDO (PLN 155.3m savings expected already in 2015E,

assuming 3k employees agree to leave), our EBIT and NI estimates go down by

only 1-6% and 3-7% for 2015-18E, respectively, following 83% cut in 2014E (PLN

274m PDO related provision creation and additional PLN 41.8m of one-off type

headcount-related costs assumed for 4Q14E), and still imply decent growth

prospects for the short-to-midterm (2015-17E CAGRs of around 21% for both

EBIT and NI).

Table 1 Old vs. new forecasts

Changes to estimates 2014E 2015E 2016E 2017E Income statement (PLN m) OLD NEW ∆ OLD NEW ∆ OLD NEW ∆ OLD NEW ∆

Sales consolidated 4,603 4,250 -8% 4,781 4,238 -11% 5,099 4,478 -12% 5,275 4,705 -11%

Revenues from services sold 4,469 4,159 -7% 4,651 4,131 -11% 4,960 4,364 -12% 5,131 4,586 -11%

Revenues from goods&mat sold 85 54 -36% 79 66 -16% 84 70 -17% 87 73 -16%

Other operating revenues 49 37 -24% 51 41 -19% 55 44 -20% 56 46 -19%

Operating expenses -4,248 -4,189 -1% -4,369 -3,841 -12% -4,557 -3,970 -13% -4,686 -4,129 -12%

Depreciation and impairments -406 -374 -8% -445 -427 -4% -487 -466 -4% -535 -513 -4%

Consumption of supplies&mat -674 -627 -7% -676 -630 -7% -702 -650 -8% -709 -666 -6%

3rd party services costs -1,365 -1,305 -4% -1,394 -1,320 -5% -1,449 -1,359 -6% -1,471 -1,398 -5%

Taxes and fees -41 -42 2% -43 -43 0% -45 -45 -1% -46 -46 0%

Employee benefits -1,559 -1,738 11% -1,607 -1,294 -19% -1,657 -1,314 -21% -1,700 -1,362 -20%

Other -41 -36 -12% -43 -37 -14% -45 -39 -15% -46 -40 -14%

Value of goods&mat sold -71 -39 -45% -66 -50 -24% -70 -55 -22% -73 -57 -21%

Other operating expenses -92 -29 -68% -95 -41 -57% -102 -44 -57% -105 -46 -56%

EBIT 355 62 -83% 412 397 -4% 542 508 -6% 588 576 -2%

Net financial activity 12 -2 n.a. 13 -5 n.a. 10 -7 n.a. 16 -4 n.a.

Share in profit of associates 12 0 n.a. 0 0 n.a. 0 0 n.a. 0 0 n.a.

Extraordinary items 0 0 n.a. 0 0 n.a. 0 0 n.a. 0 0 n.a.

Pre-tax profit 379 59 -84% 425 392 -8% 552 501 -9% 604 572 -5%

Tax -91 -8 -92% -98 -75 -24% -116 -95 -18% -121 -109 -10%

Net profit before minorities 288 52 -82% 327 318 -3% 436 406 -7% 483 464 -4%

Minority -3 -2 -45% -3 -2 -45% -3 -2 -45% -3 -2 -45%

Net profit after minorities 285 50 -83% 324 316 -3% 433 404 -7% 480 462 -4%

EBITDA 761 436 -43% 857 824 -4% 1,028 974 -5% 1,124 1,089 -3%

Source: BESI Research for estimates NB 2018 estimates can be found in the Financial Statements section

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PKP Cargo – 4Q14 results preview

We expect headline earnings to be deep in the red in 4Q14, mainly due to the

extra provisioning we forecast in the period for the voluntary leavers scheme;

adjusting for one-off items, we expect 4Q14 net income to be close to 4Q13

results (linked to an operating margin improvement and despite a forecast fall

in the top line).

PKP Cargo is scheduled to report its 4Q14 results in March 2015. We expect

the company’s bottom line after minorities to come in at a PLN 176.0m loss for

4Q14 versus PLN 78.6m posted for the base quarter. This outcome should

relate, however, primarily to a forecast PLN 273.6m provision related to the

recently adopted voluntary redundancies program (PDO), as well as another

estimated PLN 41.8m in one-off type headcount costs in 4Q14 (mainly a

provision creation for anniversary bonuses for staff that is linked to a material

fall in discount rate). When adjusted for this items, we estimate PKP Cargo’s

net income to show only a 7.4% y/y decline in the last quarter of 2014, which

should be mainly attributed to the fact that the firm booked material negative

minority interest in the base period of 2013, and despite expected pick-up on

EBIT as well as pre-tax profit lines in the period (the effect of operating

margin forecast improvement).

We forecast total revenues at PLN 1,081.6m (down 15.5% y/y) in 4Q14. This should

be mainly due to an estimated decrease in PKP Cargo’s core revenue line by 12.0%

y/y to PLN 1,058.5m in 4Q14 – on the back of a forecast fall in the firm’s freight

turnover by 4.7% y/y to 7,55m tkm in the period (linked predominantly to forecast

continued depressed PL coal exports, freight disturbances (causing a need to find

alternative arrangements and affecting average trading speed), related to

intensified rail infrastructure modernization works and the changes to the

country’s rail freights structure, affecting the firm’s avg. trading haul in selected

segments), and also linked to a forecast 7.7% y/y decline in the unit tariff to PLN

0.1402 in 4Q14 (a consequence of harsh competition in the market, hitting the

firm’s contracts profitability, especially in the coal segment).

We forecast EBIT at a PLN 220.2m loss for 4Q14, compared to PLN 93.3m in

4Q13. This should be due predominantly to the fact we expect PKP Cargo’s

headcount expenditures to be lifted by an estimated PLN 273.6m extra

provisioning in 4Q14, related to the recently passed PDO (our estimate is

based on the assumption that 3,000 employees leave the company and will

get 20 monthly salaries on average), as well as an estimated PLN 41.8m of

one-off type headcount costs in 4Q14 (mainly a provision created for

anniversary bonuses for staff, linked to a material fall in the discount rate). At

the same time, we forecast the firm’s 4Q14 EBIT adjusted for the above-

mentioned items to be 2.1% above the 4Q13 figure. Despite a visible decline in

the top line level, this should be a consequence of a forecast improvement in

the firm’s operating margin to 8.8% in 4Q14 (adjusted for one-offs) from 7.3%

in the base period (linked predominantly to main variable operating costs’

optimization, finally resulting in more dynamic y/y decline in total operating

expenses versus an estimated y/y fall in core revenues in the period).

We forecast the net financial result at a PLN 5.9m loss in 4Q14 versus a gain of

PLN 4.8m in 4Q13. While the 4Q13 figure was boosted by a positive

revaluation of the firm’s FX-denominated debt (material PLN strengthening vs.

EUR in the period), FX movements were unfavorable in 4Q14. As a result, we

forecast PKP Cargo’s pre-tax profit to come in at a PLN 226.1m loss in 4Q14

versus PLN 85.7m in 4Q13.

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PKP Cargo: 4Q14 results preview

In PLN m 4Q13A 3Q14A 4Q14F y/y q/q

Total revenues 1,279.7 1,069.1 1,081.6 -15.5% 1.2%

Revenues from services sold 1,202.4 1,047.1 1,058.5 -12.0% 1.1%

Revenues from goods & materials sold 22.9 16.0 14.4 -36.9% -9.5%

Other operating revenues 54.4 6.0 8.6 -84.2% 44.4%

Operating expenses 1,186.4 956.2 1,301.8 9.7% 36.1%

Depreciation and impairments 108.5 90.5 102.1 -5.9% 12.8%

Consumption of supplies and materials 189.7 154.3 158.5 -16.5% 2.7%

3rd party services costs 457.8 328.1 338.7 -26.0% 3.2%

Taxes and fees 11.0 10.4 11.1 0.7% 7.2%

Employee benefits 388.1 348.2 664.6 71.2% 90.9%

Other -8.4 7.4 6.9 -181.5% -7.8%

Value of goods and materials sold 16.5 10.8 12.0 -27.4% 11.2%

Other operating expenses 23.1 6.6 7.9 -65.7% 20.7%

EBIT 93.3 112.8 -220.2 n.a. n.a.

EBIT margin 7.3% 10.6% -20.4%

EBITDA 201.8 203.3 -118.1 n.a. n.a.

EBITDA margin 15.8% 19.0% -10.9%

Net financial result 4.8 8.7 -5.9 n.a. n.a.

Share in profit of associates -14.1 0.4 0.0 n.a. n.a.

Pre-tax profit 85.7 121.9 -226.1 n.a. n.a.

Tax 15.5 22.7 -50.5 n.a. n.a.

Net income before minorities 70.2 99.2 -175.7 n.a. n.a.

Minority -8.5 0.2 0.3 n.a. 63.3%

Net income after minorities 78.6 99.1 -176.0 n.a. n.a.

Net profit after minorities margin 6.1% 9.3% -16.3%

Source: BESI Research for estimates, Company data

PKP Cargo: 4Q14 results preview - adjusted for 4Q14E headcount related one-offs

In PLN m 4Q13A 3Q14A 4Q14F y/y q/q

Total revenues 1,279.7 1,069.1 1,081.6 -15.5% 1.2%

Revenues from services sold 1,202.4 1,047.1 1,058.5 -12.0% 1.1%

Revenues from goods & materials sold 22.9 16.0 14.4 -36.9% -9.5%

Other operating revenues 54.4 6.0 8.6 -84.2% 44.4%

Operating expenses 1,186.4 956.2 986.3 -16.9% 3.1%

Depreciation and impairments 108.5 90.5 102.1 -5.9% 12.8%

Consumption of supplies and materials 189.7 154.3 158.5 -16.5% 2.7%

3rd party services costs 457.8 328.1 338.7 -26.0% 3.2%

Taxes and fees 11.0 10.4 11.1 0.7% 7.2%

Employee benefits 388.1 348.2 349.2 -10.0% 0.3%

Other -8.4 7.4 6.9 -181.5% -7.8%

Value of goods and materials sold 16.5 10.8 12.0 -27.4% 11.2%

Other operating expenses 23.1 6.6 7.9 -65.7% 20.7%

EBIT 93.3 112.8 95.2 2.1% -15.6%

EBIT margin 7.3% 10.6% 8.8%

EBITDA 201.8 203.3 197.4 -2.2% -2.9%

EBITDA margin 15.8% 19.0% 18.2%

Net financial result 4.8 8.7 -2.8 n.a. n.a.

Share in profit of associates -14.1 0.4 0.0 n.a. n.a.

Pre-tax profit 85.7 121.9 92.4 7.9% -24.2%

Tax 15.5 22.7 19.3 24.3% -14.9%

Net income before minorities 70.2 99.2 73.1 4.2% -26.3%

Minority -8.5 0.2 0.3 n.a. 63.3%

Net income after minorities 78.6 99.1 72.8 -7.4% -26.5%

Net profit after minorities margin 6.1% 9.3% 6.7%

Source: BESI Research for estimates, Company data

of 22

Acquisition of Advanced World Transport BV

Transaction – key facts

At the end of December 2014, PKPC announced it had signed an agreement to buy

an 80% stake in the second-biggest Czech rail freight carrier Advanced World

Transport BV (AWT) from Czech billionaire Zdenek Bakala and The Bakala Trust for

EUR 103.2m (or around PLN 445m; EUR/PLN at 4.31). The deal follows a preliminary

agreement signed on September 2 and is conditional, among others, on the consent

of Polish, German, Czech and Slovak market regulators.

In parallel, PKP Cargo signed an option agreement allowing AWT sellers (Zdenek

Bakala and The Bakala Trust) to received potential commissions from PKPCargo

(incl. AWT) related to the revenues from new contracts agreed with NWR group

entities (owned by Zdenek Bakala). This deal will be valid for three years with the

potential for it to be extended for another three.

At the same time, PKPC has a call option on the remaining 20% in AWT that it can

exercise between 2017 and 2020, under an agreement between PKPC and AWT's

minority stake owner Minezit. The call option price will be no lower than the

difference between EUR 40m and any dividend or dividend-like payments made by

AWT to Minezit. Minezit, in turn, was granted a put option for its AWT stake it can

exercise between 2017 and 2020 at a price no lower than EUR 27m.

PKPC’s CEO flagged the firm expects to finalize the takeover of AWT in the coming

months, while the deal is planned to be financed with own means. On the top of

that, he highlighted that AWT’s full historical financials as well as operational results

cannot be revealed at this stage.

AWT at a glance

AWT is the second-largest Czech rail freight carrier with a c. 8% share in the market

in 2012 when freight turnover is taken into consideration, and a c. 6% share in Czech

rail freight volume in the period. The firm’s freight turnover amounted to 1.59bn tkm

in 2013 (some 5.3% of PKPC’s turnover in the period), while freight volume was

12.8m t (around 11.1% of PKPC’s turnover in the period).

The company is managing rolling stock formed of 170 locomotives (c. 6% of the

total volume of locomotives used by PKPC at present) and over 5,000 railcars

(approx. 8% of the total volume of wagons used by PKPC at present). Moreover, the

firm is managing some 60 sidings (25 of which have day-to-day operations), as well

as the intermodal terminal Ostrava-Paskov (located 60km from the Slovakian

border and 25km from the Polish border; storage capacities at around 2,400 TEU).

Apart from core rail freight activity, through its subsidiary Recultivace, AWT is

present in the construction sector – the revenues from construction activity

accounted for some 19% of the company’s total sales in 2013 (revenues at c. EUR

58m in 2013, according to our calculations).

Figure 1 Share in total Czech rail freight

volume in 2012

Figure 2 Share in total Czech rail freight

turnover in 2012

Figure 3 Revenues structure in 2013

Source: SZDC Source: SZDC Source: AWT

CD Cargo76%

AWT6%

Unipetrol Doprawa

3%

PKP Cargo2%

LTE Logistics1%

IDS Cargo1%

Other11%

CD Cargo79%

AWT8%

Unipetrol Doprawa

4%

PKP Cargo2%

LTE Logistics1%

IDS Cargo1%

Other5%

Rail freight cargo (incl.

siding services)71%

Rosco (rail freight

connected)8%

Recultivace (construction)

19%

Other2%

of 22

Czech rail freight market – main characteristics and general view

Coal transportation occupies an important role in Czech Republic’s rail freight

mix (solid fuels share in total domestic freight volume amounted to around

60% in recent years, according to the Czech Statistical office and SZDC). At

the same time, hard coal consumption in the country (as well as its exports)

have been in clear decline since 2010 and we think this trend is unlikely to

change going forward given the plans for a gradual decrease in coals’ share

coal in the Czech energy generation mix.

The planned changes to the Czech energy generation mix are also likely to

affect lignite freight volumes in the country going forward (unlike Poland,

Czech lignite, due to its characteristics, can be transported by rail). We thus

wouldn’t expect the Czech rail freight market to show any major growth from

the current levels in terms of both freight volume and turnover in the short-to-

midterm (freight volume at 84m t, while turnover at 14.0bn tkm in 2013,

according to the Czech Statistical Office), even if other key freight segments

benefit from potential economic revival.

Figure 4 Czech national rail freight mix evolution (volume based) Figure 5 Hard coal consumption in Czech Republic (in t m)

Source: Czech Statistical Office, SZDC Source: Czech Statistical Office, Eurostat

Figure 6 Czech energy mix in 2010-2040 Figure 7 Hard coal exports in Czech Republic

Source: International Energy Agency, euracoal.org, European Commission Source: Czech Statistical Office, Eurostat

60.8% 60.7% 60.7% 61.9% 61.0%

9.6% 11.2% 7.5% 7.7% 7.3%

4.7% 4.6%5.6% 5.2% 5.5%

4.6% 4.1% 5.5% 4.8% 5.1%3.2% 2.9% 3.7% 3.5% 3.9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012

Solid fuels Iron ores Coke

Metallurgic products Agro Chemicals

Other commodities Timber Other

3.66 3.503.09

2.22 2.49

2.48

1.62 1.31

1.24

7.49 7.30

6.81

0

1

2

3

4

5

6

7

8

2010 2011 2012

Electricity & heat production Metallurgic industry

Other purposes Total consumption

7% 1%

50%

15%

6%4%

33%

51%

7%

22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2040

Hard coal Lignite Gas

Other gas fuels Nuclear Renewable sources

Other

6.32 6.26

5.374.84

759.8

852.9

643.4

443.4

0

100

200

300

400

500

600

700

800

900

0

1

2

3

4

5

6

7

2010 2011 2012 2013

Volume (in m t) Value (in EUR m)

of 22

Figure 8 Czech rail freight volume (m t) and avg. trading haul (km) evolution Figure 9 Czech rail freight turnover evolution (bn tkm)

Source: Czech Statistical Office Source: Czech Statistical Office

On the positive side, while state-owned CD Cargo continues to clearly dominate

the Czech rail freight sector, smaller players have proved they are gradually able

to gain market share at its expense over the past couple of years and we would

expect this trend to continue – when freight turnover is taken into consideration,

CD cargo’s share in the country’s total market declined from 97% in 2005 to

80% in 2012 (according to SZDC).

Figure 10 CD Cargo’s market share development (volume based) Figure 11 CD Cargo’s market share development (turnover based)

Source: Czech Statistical Office, CD Cargo Source: Czech Statistical Office, CD Cargo

Planned M&A seems optimal from expansionary point of view and rationale

from PKPC’s b/sheet strength perspective

We agree with PKPC’s management that the direction of the recent expansion is

optimal from a strategic point of view, opening the gate to other South European

markets apart from the Czech Republic, while at the same time helping it avoid

some of the stiff competition from DB Schenker in the West and the issues with

technological barriers related to wide gauge lines in the East. On the top of that,

given PKPC’s clearly dominant position in the PL market, any attempted acquisition

of a domestic competitor could be rejected by the PL Antimonopoly Watchdog.

We also regard the decision to expand via M&A activity as rationale from PKPC’s

b/sheet strength perspective. With its solid cash position (PLN 665m at end-3Q14)

and moderate debt (net cash at PLN 68m at end-3Q14) offering significant room for

a leverage increase, as well as forecast continued strong OCF generation, we do not

expect the firm to face any major difficulties covering its CAPEX needs (including

planned purchase of 15 to 20 new multisystem locomotives) financing the recently

announced transaction and, at the same time, distributing decent dividends in the

years ahead (15E/16E DY at 2.5%/4%).

85.6

82.9

87.1

83.084.0

174

166

164

172

166

158

160

162

164

166

168

170

172

174

176

70

72

74

76

78

80

82

84

86

88

2005 2010 2011 2012 2013

Total freight volume Avg. trading haul

6.22 5.71 6.24 5.84 5.54

8.64

8.068.08 8.43

8.42

14.87

13.7714.32 14.27

13.97

0

2

4

6

8

10

12

14

16

2005 2010 2011 2012 2013

National International Total

83%

83%

82%

78%

79%

77%

75%

17%

17%

18%

22%

21%

23%

25%

0% 20% 40% 60% 80% 100%

2006

2007

2008

2009

2010

2011

2012

CD Cargo Other

94%

94%

93%

87%

86%

85%

85%

6%

6%

7%

13%

14%

15%

15%

0% 20% 40% 60% 80% 100%

2006

2007

2008

2009

2010

2011

2012

CD Cargo Other

of 22

AWT – Earnings outlook ex and including assumed synergies

Full historical financial as well as operating data on AWT has not been

released. However, based on publically available information (published in

deal-related presentation and/or announced by PKP Cargo’s management) we

have managed to compile a simplified financial model for the company. We

expect AWT’s bottom line to increase by 123% y/y to EUR 7.8m in FY2014E

(EUR 7.1m reported for 9M14), linked mainly to a forecast increase in the firm’s

EBIT margin vs. 2013 and despite a significant y/y decline in the top line

forecast for the period (both related to the recent changes applied to the

company’s general business model – moving away from low margin

forwarding services to focus on more profitable freight services with the use

of own rolling stock).

We forecast a further decline in the company’s revenues combined with

pressure on the operating margin in 2015-18E linked mainly to: i) loss of the

Chvaletice contract; ii) worsening of the terms of the contract with NWR,

recently extended for three years; iii) expected continued fall in hard coal

consumption in CR going forward; and iv) forecast increase in competition in

the country’s rail freight market. As a result, we forecast AWT’s net income ex

synergies to fall by 16% y/y to EUR 6.5m in 2015E and further down by 5% and

2% to EUR 6.2m and EUR 6.1m for 2016E and 2017E, respectively, before a

slight pick up to EUR 6.4m in 2018E.

At the same time, however, factoring in anticipated synergies between PKPC

and AWT in the area of the latter’s rolling stock rental costs (discussed in

more details in the EBIT related paragraph below), at an estimated amount of

EUR 7.8m for 2015-18E, we forecast the company’s bottom line to pick up to

EUR 7.9m in 2016E after only a 1% decline to EUR 7.7m for the current year,

and then up slightly to EUR 8.0m by 2018E.

Figure 12 Net income development (ex and

including expected synergies), in EUR m

Figure 13 Revenues and EBIT and EBIT incl.

synergies margin development (EUR m)

Source: AWT, BESI research for estimates Source: AWT, BESI research for estimates

Revenue outlook

We forecast AWT’s top line to decline by 29% y/y to EUR 195m in FY2014E and

further down by 15% y/y to EUR 166m in 2015E. After that, we expect the firm’s

revenues to show a continued fall, though only at a slight 2015-18E CAGR of 1.0%

to EUR 161m in 2018E.

We forecast the revenues from AWT’s construction division Recultivace to stay

practically flat on an annual basis at EUR 59m in 2014E. However, on the back of

the changes to the company’s general business model – moving away from low

margin forwarding services to focus on more profitable freight services with the

use of own rolling stock – we expect AWT’s revenues from core rail freight activity

(including Rosco’s activity, AWT’s arm providing railcars rental services, as well as

rolling stock maintenance services) to fall by 37% to EUR 137m in the period.

Going into more details, the decline is forecast to come primarily from a fall in

unitary service price (to EUR 0.066 in 2014E from EUR 0.137 in 2013; estimated

EUR 0.071 in 9M14) and despite an expected 29% y/y increase in the firm’s freight

turnover to 2,055m tkm in the period (1,580m tkm realized in 9M14).

3.5

7.8

6.5

6.2

6.1 6

.4 6.7

3.5

7.8

7.7 7.9

7.9 8.0 8.1

0

1

2

3

4

5

6

7

8

9

2013 2014E 2015E 2016E 2017E 2018E 2019E

Net income ex synergies Net income incl. synergies

274.5

195.0

165.6 162.2 160.4 160.7 162.7

5.513.7 11.9 12.0 11.9 11.9 12.0

2.0%

7.0%7.2%

7.4% 7.4% 7.4% 7.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

50

100

150

200

250

300

2013 2014E 2015E 2016E 2017E 2018E 2019E

Total revenues EBIT incl. synergies

EBIT incl. synergies margin

of 22

We forecast AWT’s freight turnover to fall by c.20% y/y to 1,644m tkm in

2015E. This should mainly because of the loss of the Chvaletice contract (it

had a one year contract in 2014; for 2015 this has been taken over by CD

Cargo). Moreover, we assume a 2.5% fall in the unitary core service price to

EUR 0.065 for the period, factoring in worsening terms of the contract with

NWR (extended for another three years recently), linked mainly to tough

competition in the hard coal segment in the Czech rail freight market. As a

consequence, our estimate for AWT’s core revenue line stands at EUR 106.5m

(down 22.0% y/y) for 2015E, while again assuming relatively stable revenues

from the construction activity, total sales are forecast at EUR 166m (down 15%

y/y) for the period.

Factoring in an expected continued fall in hard coal consumption in the Czech

Republic accompanied by growing competition in the market (to some extent

offset by a forecast continued decline in the market share of national carrier

CD Cargo to the benefit of smaller players), we forecast AWT’s freight

turnover to show a moderate decline in 2016-18E to 1,595m tkm in 2018E. At

the same time, we conservatively forecast the company’s unitary service price

to gradually edge down to EUR 0.063 in 2018E. As a combined result of the

above mentioned, we expect AWT’s top line to decline at a 2015-18E CAGR of

1.0% to EUR 161m in 2018E.

Figure 14 Top line development (EUR m) Figure 15 Freight turnover evolution (m tkm) Figure 16 Unitary service price evolution (EUR)

Source: AWT, BESI research for estimates Source: AWT, BESI research for estimates Source: AWT, BESI research for estimates

EBIT margin and EBIT expected development (excluding and including

assumed synergies)

We expect AWT’s EBIT margin to jump from 2% in 2013 to 7% in FY2014E (in line

with the firm’s 9M14 reported margin), predominantly due to the abovementioned

changes to the company’s general business model (withdrawal from relatively low

margin forwarding services). As a consequence of a forecast operating margin

increase and despite the forecast fall in the top line, we estimate AWT’s EBIT at

EUR 13.7m, up 149% y/y for FY2014E. (The firm’s EBITDA is forecast at EUR 31.2m

for FY2014E, forecasting a significant decline in depreciation to EUR 17.4m in

2014E from EUR 24.7m in 2013, when it was boosted by a one-off item).

Given the expected fall in AWT’s top line in 2015-18E (operating leverage

effect), loss of the relatively high margin Chvaletice contract, forecast

worsening of the terms of the recently extended contract with NWR, as well

as a forecast increase in the construction activity’s share of revenues in the

firm’s total sales going forward (generating lower margin versus the

company’s core activity), we forecast AWT’s EBIT margin ex synergies to

decline to 6.3%/6.1%/6.0% for 2015E/16E/17E, before a slight pick up to 6.2% in

2018E. As a result, we estimate AWT’s ex synergies operating income to fall by

24% y/y to EUR 10.4m in 2015E and further down to EUR 9.6m in 2017E,

before a slight pick up to EUR 10.0m in 2018E.

216.9

136.5106.5 102.8 100.7 100.7 102.8

57.7

58.5

59.1 59.4 59.7 60.0 60.0

274.5

195.0

165.6 162.2 160.4 160.7 162.7

0

50

100

150

200

250

300

2013 2014E 2015E 2016E 2017E 2018E 2019E

Recultivace revenues & other

Revenues from rail cargo services

Total sales

1,588

2,055

1,644

1,611

1,595

1,595

1,611

0 500 1,000 1,500 2,000 2,500

2013

2014E

2015E

2016E

2017E

2018E

2019E

0.137

0.066 0.065 0.064 0.063 0.063 0.064

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

0.160

2013 2014E 2015E 2016E 2017E 2018E 2019E

a fall predominantly linked to changes to the company’s general business model - withdrawal from low margin forwarding services

of 22

At the same time, factoring in forecast synergies between PKPC and AWT in

the area of the latter’s rolling stock rental costs (one third of 5k railcars used

by the Czech entity is rented out and we expect it to be gradually replaced by

PKPC’s equipment), we forecast the company’s operating margin to increase

to 7.2% in 2015E and further up to 7.4% in 2016E-18E (AWT’s total operating

expenditures to come an estimated EUR 1.5m/2.1m/2.2/1.9m below their ex

synergies forecast level for 2015E/16E/17E/18E; in other words we value these

synergies at c.EUR 8m in 2015-18E). Given the abovementioned, our EBIT

including forecast synergies stands at EUR 11.9m (down 13% y/y) for 2015E

and at c. EUR 12.0m for 2016E-18E.

Figure 17 EBIT ex and including assumed synergies development Figure 18 EBIT margin ex and including assumed synergies

Source: AWT, PKP Cargo, BESI research for estimates Source: AWT, PKP Cargo, BESI research for estimates

Table 2 AWT – Summary financial forecasts (in EUR m)

Income statement (EUR m) 2013 2014E 2015E 2016E 2017E 2018E 2019E

Total revenues 274.5 195.0 165.6 162.2 160.4 160.7 162.7

Revenues from rail cargo services 216.9 136.5 106.5 102.8 100.7 100.7 102.8

Recultivace revenues & other 57.7 58.5 59.1 59.4 59.7 60.0 60.0

Operating expenses ex synergies 269.1 181.4 155.1 152.3 150.8 150.7 152.5

Operating expenses incl. synergies 269.1 181.4 153.6 150.2 148.5 148.8 150.7

EBIT ex synergies 5.5 13.7 10.4 9.9 9.6 10.0 10.3

margin 2.0% 7.0% 6.3% 6.1% 6.0% 6.2% 6.3%

EBIT incl. synergies 5.5 13.7 11.9 12.0 11.9 11.9 12.0

margin 2.0% 7.0% 7.2% 7.4% 7.4% 7.4% 7.4%

Net income ex synergies 3.5 7.8 6.5 6.2 6.1 6.4 6.7

Net income incl. synergies 3.5 7.8 7.7 7.9 7.9 8.0 8.1

EBITDA ex synergies 30.2 31.2 27.0 26.4 26.5 27.6 28.2

EBITDA incl. synergies 30.2 31.2 28.5 28.5 28.7 29.6 29.9

Balance sheet (EUR m) 2013 2014E 2015E 2016E 2017E 2018E 2019E

Fixed assets 231.0 221.4 220.6 219.6 218.6 217.5 216.2

Non-fixed assets 96.9 81.0 73.6 81.3 84.6 93.8 103.9

Cash 26.3 23.0 24.0 32.7 36.5 45.6 55.1

Other current assets 70.6 58.0 49.7 48.6 48.1 48.2 48.8

TOTAL ASSETS 327.9 302.4 294.2 300.9 303.2 311.3 320.2

Equity 177.2 185.0 192.7 200.6 208.5 216.5 224.6

Debt 63.9 50.2 45.2 45.2 40.2 40.2 40.2

Other liabilities 86.8 67.2 56.3 55.1 54.5 54.6 55.3

TOTAL LIABILITIES 327.9 302.4 294.2 300.9 303.2 311.3 320.2

Net debt 37.6 27.2 21.2 12.5 3.7 -5.4 -14.9

Cash flow statement (EUR m) 2013 2014E 2015E 2016E 2017E 2018E 2019E

Net income incl. synergies 3.5 7.8 7.7 7.9 7.9 8.0 8.1

Depreciation 24.7 17.6 16.6 16.5 16.8 17.7 17.9

Change in WC

-7.0 -2.6 -0.1 -0.1 0.0 0.1

Operating cash flow

18.4 21.7 24.3 24.7 25.7 26.1

Investing cash flow

-8.0 -15.7 -15.6 -15.9 -16.6 -16.6

Change in debt

-13.7 -5.0 0.0 -5.0 0.0 0.0

Dividend

0.0 0.0 0.0 0.0 0.0 0.0

Financing cash flow

-13.7 -5.0 0.0 -5.0 0.0 0.0

Total cash flow -3.3 1.0 8.7 3.8 9.1 9.5

Source: AWT, BESI Research for estimates

5.5

13.7

10.4 9.9 9.6 10.0 10.3

1.5 2.1 2.2 1.9 1.8

5.5

13.7

11.9 12.0 11.9 11.9 12.0

0

2

4

6

8

10

12

14

16

2013 2014E 2015E 2016E 2017E 2018E 2019E

EBIT ex synergies Anticipated synergies EBIT incl. synergies

2.0%

7.0%

6.3%6.1%

6.0%6.2% 6.3%

2.0%

7.0%

7.2%7.4% 7.4% 7.4% 7.4%

1%

2%

3%

4%

5%

6%

7%

8%

2013 2014E 2015E 2016E 2017E 2018E 2019E

EBIT ex synergies margin EBIT incl. synergies margin

an increase in 2014E predominantly linked to changes to the company’s general business model - withdrawalfrom low margin forwarding services

of 22

Key risks to our financial forecasts for AWT and the acquisition in general

Among the main risks to our financial forecasts for AWT and the deal in general

we would point out: i) acceleration of the decline of hard coal consumption in the

Czech Republic, as well as its exports going forward; ii) material fall in lignite

usage in Czech energy generation mix in the medium term; and iii) close

cooperation of AWT with NWR, dealing with liquidity issues (EBIT at EUR -973m

in 2013; net-debt at EUR 635m at end-2013; negative equity in 2013).

On the top of that, PKPC will have to face a general risk of entering a foreign

market. However, the fact that the Czech entity Minezit (not connected with

Zdenek Bakala) will still be AWT’s minority shareholder (20% stake) largely limits

this risk in our view.

Important to note: AWT’s portfolio of contracts does not contain any major

agreements with Czech state-owned companies at present, which to some

extent limits the risk of potential aggressive price competition from national

carrier CD Cargo (which mostly services large contracts from state owned

firms).

AWT – Valuation

We value AWT using a discounted cash flow (DCF) method. We established

our assumptions for the company's cost-of-equity by using a variable risk-free

rate (12-month forward interest rate) and adding a 4.5% equity risk premium.

This risk premium was added for each year. The risk-free rate used in the

calculation of WACC for 2015-19E was based on the 12-month forward interest

rate for the Czech Republic. At the same time, we consistently use a beta of 1

so as not to distort WACC and the comparability of our valuations.

Consequently, we estimate a WACC range of 5.0%-7.0% during our explicit

forecast period from 2015 to 2019. For the terminal value calculation, we used

perpetuity based on FCF estimated for 2019E, a long-term growth rate of 1.5%

and a WACC of 7.0%.

In our base case scenario we incorporate the most tangible (in our view)

potential synergies between PKP Cargo and AWT.

Factoring in expected synergies in the area of AWT’s rolling stock rental costs

(estimated at EUR 9.6m in 2015-19E; described in the ‘Earnings outlook’

section above), as well as costs of its maintenance (expected to emerge from

using both: PKP Cargo’s repair forces instead of 3rd

party services and the

company’s modernized rolling stock; estimated at EUR 4.5m in 2015-19E;

visible as savings in our CAPEX forecast for AWT vs. ex synergies CAPEX

spending scenario), we value the entire AWT at EUR 169.2m. This translates

into PLN 585m for an 80% stake in the firm (based on current EUR/PLN

exchange rate at 4.32), or some 31% above the price agreed to be paid by PKP

Cargo.

Excluding expected synergies from the merger with PKP Cargo, our valuation

of AWT would stand at EUR 125.3m (for 100% of equity). This translates into

PLN 433m for an 80% stake in the firm (based on current EUR/PLN exchange

rate at 4.32), or some 3% below the price agreed to be paid by PKP Cargo,

which means we estimate the present value of forecast synergies at AWT

(including positive effect on terminal value for the entity) at around PLN 152m

(when an 80% stake in AWT is taken into consideration).

of 22

DCF valuation

(EUR m, unless stated) 2015E 2016E 2017E 2018E 2019E

EBIT ex synergies 10.4 9.9 9.6 10.0 10.3

EBIT incl. synergies 11.9 12.0 11.9 11.9 12.0

Tax rate 0.2 0.2 0.2 0.2 0.2

NOPAT ex synergies 8.4 8.0 7.8 8.1 8.3

NOPAT incl. synergies 9.7 9.7 9.6 9.6 9.8

D&A 16.6 16.5 16.8 17.7 17.9

Capex ex synergies -16.6 -16.5 -16.8 -17.4 -17.6

Capex incl. synergies -15.7 -15.6 -15.9 -16.6 -16.6

Change of WC -2.6 -0.1 -0.1 0.0 0.1

FCF ex synergies 5.9 7.9 7.7 8.4 8.7

FCF incl. synergies 7.9 10.6 10.5 10.8 11.1

cost of debt 3.2% 3.2% 4.1% 4.9% 4.9%

cost of equity 5.5% 5.5% 6.5% 7.5% 7.5%

WACC 5.0% 5.0% 6.0% 7.0% 7.0%

PV (FCF ex synergies) 5.6 7.1 6.6 6.7 6.5

PV (FCF incl. synergies) 7.5 9.6 9.0 8.6 8.3

Sum of FCF PVs (ex synergies) 32.6 Sum of FCF PVs (incl. synergies) 43.0

FCF terminal growth rate 1.5% PV of terminal value ex synergies 119.5 PV of terminal value incl. synergies 152.8

Enterprise value ex synergies 152.5 Enterprise value incl. synergies 196.4

Net debt, end-2014E -27.2 Equity value ex synergies 125.3 Equity value incl. Synergies 169.2

Equity value ex synergies (PLN m) 541.3 Equity value incl. Synergies (PLN m) 730.8

Source: BESI research for estimates

Valuation of the combined organization (PKPC & AWT)

We value PKP Cargo stand-alone using a discounted cash flow (DCF) method.

Our revised fair value for the company stands at PLN 95.78 per share, up from

PLN 89.86, predominantly on the back of the application of the revised risk-

free-rate assumptions for Poland, as well as a 10-11% cut to our CAPEX

assumptions for the firm for 2015-2019E (forecasting falling needs for the

firm’s rolling stock maintenance following gradual modernization of Polish rail

infrastructure, hence a forecast increase in the average trade speed in the

country in the mid-to longer term).

We established our assumptions for PKP Cargo's stand-alone cost-of-equity

by using a variable risk-free rate (12-month forward interest rate) and adding a

4.5% equity risk premium. This risk premium was added for each year. The

risk-free rate used in the calculation of WACC for 2015-19E was based on the

12-month forward interest rate for Poland. At the same time, we consistently

use a beta of 1 so as not to distort WACC and the comparability of our

valuations. Consequently, we estimate a WACC range of 6.8%-7.6% during our

explicit period from 2015 to 2019. For the terminal value calculation, we used

perpetuity based on FCF estimated for 2019E, a long-term growth rate of 1.5%

and a WACC of 7.6%.

Given the limited amount of information available at this stage (detailed financial

as well as operating data for AWT is to be released only after the deal is finalized,

expected within the next couple of months according to PKPC’s management),

we decided not to fully consolidate the company into our estimates for PKP

Cargo, but just add our estimated value for an 80% stake in AWT at the valuation

level (presented in the valuation table on the next page).

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As mentioned before, incorporating the expected synergies in the area of AWT’s

rolling stock rental costs, as well as the costs of its maintenance (which we regard

as the most tangible at this stage), we value an 80% stake in the company at PLN

584.6m, which is some PLN 139.6m above the price agreed to be paid by PKPC

(or PLN 3.12 per share). Adding this amount to our stand-alone valuation for PKPC

of PLN 95.78, we arrive at a fair value for the combined entity at PLN 98.90 per

share, implying 12.4% upside potential versus the current market price.

DCF valuation (standalone and pro-forma)

(PLN m) 2015E 2016E 2017E 2018E 2019E

Revenues 4,238.4 4,477.8 4,704.9 4,696.9 4,614.0

EBIT 397.1 507.9 576.1 477.0 338.2

Tax rate 13.0% 19.0% 19.0% 19.0% 19.0%

NOPLAT 345.4 411.4 466.7 386.4 273.9

Depreciation 426.7 466.4 512.7 563.1 614.9

Capital expenditures -512.0 -591.7 -637.0 -633.5 -617.8

Change in working capital -1.3 -15.1 -13.8 -3.8 1.1

Free cash flow 258.9 271.1 328.6 312.1 272.0

Cost of equity 7.1% 7.1% 7.2% 7.8% 7.8%

After-tax cost of debt 4.5% 4.5% 4.6% 5.1% 5.1%

WACC 6.8% 6.8% 6.9% 7.5% 7.6%

PV of FCF 242.4 237.6 269.4 238.0 192.8

Sum of FCF PVs 1,180.1 FCF terminal growth rate 1.5% Terminal value 4,503.8 PV of terminal value 3,192.2 Enterprise value (PKPC stand-alone) 4,388.1 Net debt 2014E 98.3 Dividend distributed 0.0 Equity value (PKPC stand-alone) 4,289.8 Equity value per share (PKPC stand-alone) 95.78

AWT (PLN m)

EUR/PLN current 4.32 Price paid for 80% 445.0 Equity value ex synergies (80%) 433.0 Equity value incl. synergies (80%) 584.6 PKPC incl. AWT equity FV (ex synergies) 4,277.9 PKPC incl. AWT equity FV (incl. synergies) 4,429.5 Number of shares (m) 44.787 PKPC equity FV per share (incl. AWT ex synergies) 95.52 PKPC equity FV per share (incl. AWT incl. synergies) 98.90

Source: BESI research for estimates, Company data

On the top of that, we stress that due to lack of sufficient information and low

visibility at this stage, we do not factor-in any potential revenue synergies at

PKPC’s side linked to eventual realization of transit freights to South European

markets; replacement of AWT subcontractors in the Czech Republic and other

markets where it operates; or linked to AWT’s Ostrava-Paskov intermodal

terminal.

To cross-check our analysis, for the ‘new’ PKP Cargo we used a comparative

valuation to listed companies specializing in rail freight as well as operating in

the broad logistics sector. On a 2015E pro-forma EV/EBITDA of 4.71x, PKPC

trades at a 10.0% premium to sector representatives operating in Europe, and at

discounts of 53.6% and 44.5% to players focused on North American and China-

Brazil-Australia markets, respectively (all on Bloomberg consensus estimates).

We stress that PKPC’s pro-forma premium to European peers seems

predominantly linked to the recent massive slump in stock prices of Russia-

exposed players (average y-t-d decline in stock prices of Globaltrans

Investment, Transcontainer OAO, Global Ports Investments and Novorossiysk

Sea Poer, dominating European peer group, amounts to around 65%).

of 22

Sensitivity analysis of combined entity valuation

There are a number of risks to our projections and like all valuation models our

forecasts are sensitive to changes in particular assumptions. First of all, in our

sensitivity analysis, we have chosen to vary two key valuation factors: the

equity risk premium (between 3.5% and 5.5%) and terminal growth rate (from

0.5% to 2.5%).

Moreover, we present a sensitivity analysis of our valuation of the combined

entity to the changes in PKPC’s stand-alone average unit tariff and the

changes in the firm’s freight turnover (two main drivers determining the

company’s top line development). A +/- 2% change in the company’s stand-

alone average unit service price versus our original expectations

increases/decreases our equity fair value for the combined unit by some

23.7%. At the same time, a +/- 3% change to our estimates for PKPC’s stand-

alone freight turnover in explicit forecast period increases/decreases our fair

value for the combined entity by around 19.3%.

On the top of that, we present a sensitivity analysis of our valuation of the

combined organization to the changes in the assumptions concerning the

level of AWT’s EBIT margin and CAPEX spending at the firm. A +/- 2.5pp

change in operating margin level (including anticipated synergies) over the

explicit forecast period (2015-19E) increases/decreases our equity fair value of

the combined unit by around 4.6%. At the same time, a +/- EUR 5m of

additional/lower CAPEX in each year of our explicit forecast decreases/increases

our fair value of combined organization by around 8.9%.

Table 3 Valuation sensitivity to Terminal Growth Rate and Equity Risk Premium (PLN m)

Equity risk premium

5.5% 5.0% 4.5% 4.0% 3.5%

FC

F t

erm

inal

gro

wth

2.5% 97.0 104.4 113.2 123.7 136.6

2.0% 91.6 98.0 105.4 114.2 124.9

1.5% 86.9 92.5 98.90 106.4 115.3

1.0% 82.8 87.7 93.3 99.8 107.4

0.5% 79.2 83.6 88.6 94.2 100.8

Source: BESI Research for estimates

Table 4 Valuation sensitivity to the changes in average unit tariff at PKPC stand-alone and

freight turnover at PKPC stand-alone (PLN m)

Change in freight turnover

-3.0% -1.5% 0.0% 1.5% 3.0%

Ch

an

ge in

avera

ge p

rice

per

1tkm

2.0% 102.5 112.4 122.3 132.2 142.1

1.0% 91.1 100.9 110.6 120.3 130.1

0.0% 79.7 89.3 98.90 108.5 118.0

-1.0% 68.4 77.8 87.2 96.6 106.0

-2.0% 56.9 66.2 75.5 84.7 93.9


Table 5 Valuation sensitivity to EBIT margin at AWT and CAPEX spending on rolling stock

at AWT (PLN m)

Change in CAPEX assumption at AWT

5.0 2.5 0.0 -2.5 -5.0

Ch

an

ge in

EB

IT m

arg

in a

t

AW

T

2.5% 94.7 99.1 103.4 107.7 112.0

1.5% 92.9 97.3 101.6 105.9 110.2

0.0% 90.2 94.6 98.90 103.2 107.6

-1.5% 87.5 91.8 96.2 100.5 104.9

-2.5% 85.7 90.0 94.4 98.7 103.1


Peer comparison based on pro-forma EV/EBITDA

In our comparative valuation of the ‘new’ PKP Cargo, our preferred metric is

EV/EBITDA as it neutralizes the impact of differences in capital structure, taxes

and depreciation. However, we also look at P/E for the standalone entity, which

is the most commonly used and simple valuation multiple.

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We compared ‘new PKP Cargo’ (or combined organization, as named earlier) to

listed companies specializing in rail freight as well as operating in the broad

logistics sector. We split the group of peers into three subgroups: one for the

companies operating in Europe (predominantly Russia), the second covering

players operating in North America (both US and Canada), and the third one

where we include sector representatives from Brazil, China and Australia. As we

recognise no direct peers to PKP Cargo, we stress that we do not use the

comparative valuation method to derive an equity value range for the firm, but

instead use it only as a cross-check for information purposes.

On a 2015E pro-forma EV/EBITDA of 4.71x ‘new’ PKP Cargo currently trades at a

premium of 10.0% to players focused on Europe, as well as discounts of 53.6% and

44.5% to peers in North America and Brazil-China-Australia, respectively. We see

the premium as justified given the company’s clearly dominant position in the

deeply liberalized Polish rail freight market and likely upside from foreign

expansion following the deal’s expected closure, relatively favorable earnings

outlook, as well as strong balance sheet, solid OCF generating ability and

relatively wide room for additional debt drawing, allowing for dividend distribution

despite the recent M&A activity and the plans for new multisystem locomotives

purchase in the midterm.

On the top of that, we highlight that ‘new’ PKP Cargo’s current premium to

European-oriented players is closely linked to the recent massive slump in stock

prices of Russia-exposed names, being a consequence of the Ukrainian turmoil

(average last 12-month decline in stock prices of Globaltrans Investment,

Transcontainer OAO, Global Ports Investments and Novorossiysk Sea Poer,

dominating European peer group, amounted to almost 65%).

As a reminder, although PKPC has signed an agreement to buy 80% of AWT,

this is subject to the consent of the Polish, German, Czech and Slovak market

regulators.

Table 6 PKP Cargo versus peers (on current market values; priced at COB 22 January 2015)

Close price EV/EBITDA* P/E**

Country BBG ticker (local) 2014E 2015E 2016E 2014E 2015E 2016E

PKP Cargo POLAND PKP PW 88.0 8.06 4.71 3.93 78.5 12.5 9.8

Globaltrans Investment CYPRUS GLTR LI 4.6 3.18 3.28 3.46 5.6 5.9 5.5

Hamburger Logistics GERMANY HHFA GR 18.7 6.18 5.91 5.52 26.3 22.0 18.9

Transcontainer OAO RUSSIA TRCN LI 440.0 3.19 3.16 3.05 10.6 10.2 9.6

Global Ports Investments CYPRUS GLPR LI 3.5 5.30 5.20 5.43 4.8 4.4 3.6

Novorossiysk Sea Poer RUSSIA NCSP LI 1.5 3.66 3.43 3.29 1.4 1.3 1.1

Average for European peers (incl. Russia) 4.93 4.28 4.11 21.2 9.4 8.1

PKP Cargo - premium/discount to average 63.5% 10.0% -4.4% 270.3% 33.2% 20.7%

Union Pacific Corp US UNP US 114.4 10.05 9.19 8.38 17.8 16.2 14.9

Kansas City Southern US KSU US 110.6 13.32 11.76 10.50 23.1 20.1 17.9

CSX Corp US CSX US 34.7 8.60 7.97 7.41 16.3 14.8 13.7

Genese & Wyoming Inc US GWR US 86.9 10.94 9.78 8.99 19.2 16.1 14.5

Norfolk Southern Corp US NSC US 104.4 8.94 8.29 7.80 16.2 14.9 13.7

Canadian Pacific Railways CANADA CP CN 227.0 12.84 11.34 10.35 21.0 18.5 17.6

Canadian National Railway CANADA CNR CN 83.1 14.01 12.77 11.697175 22.2 20.1 18.2

Average for North American peers 11.24 10.16 9.31 19.4 17.3 15.8

PKP Cargo - premium/discount to average -28.3% -53.6% -57.7% 304.2% -27.6% -38.1%

America Latina Logistica BRAZIL ALLL3 BZ 4.0 5.03 4.35 3.72 25.0 11.5 5.8

China Railway CHINA 600125 CH 8.5 19.60 16.24 11.25 32.3 25.6 18.5

Daqin Railway CHINA 601006 CH 10.8 7.27 6.27 6.06 10.9 9.5 8.5

Asciano AUSTRALIA AIO AU 5.9 7.98 7.30 7.01 14.5 12.5 11.6

Aurizon Holdings AUSTRALIA AZJ AU 4.8 9.18 8.28 7.69 17.0 15.6 14.0

Average for other peers 9.81 8.49 7.15 20.0 14.9 11.7

PKP Cargo - premium/discount to average -17.8% -44.5% -45.0% 293.1% -16.5% -16.6%

*on pro-forma basis (combined PKPC and AWT) **PKPC stand-alone

Source: BESI research estimates for PKP Cargo; Bloomberg consensus for not-rated companies

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Financial Statements – PKP Cargo stand-alone (IFRS)

Income statement (PLN m) 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Sales consolidated 5,577.0 5,173.4 4,797.5 4,250.4 4,238.4 4,477.8 4,704.9 4,696.9

Revenues from services sold 5,385.0 5,064.2 4,553.9 4,158.9 4,131.0 4,364.3 4,585.7 4,577.9

Revenues from goods & materials sold 145.5 95.0 163.8 54.1 66.1 69.8 73.4 73.2

Other operating revenues 46.5 14.2 79.8 37.4 41.3 43.6 45.9 45.8

Operating expenses -5,159.4 -4,829.4 -4,687.3 -4,188.9 -3,841.3 -3,969.9 -4,128.8 -4,219.9

Depreciation and impairments -510.0 -422.8 -388.8 -374.2 -426.7 -466.4 -512.7 -563.1

Consumption of supplies & materials -854.0 -779.5 -725.8 -626.6 -629.5 -649.5 -666.5 -661.4

3rd party services costs -1,966.4 -1,814.4 -1,580.1 -1,304.8 -1,319.6 -1,359.2 -1,398.4 -1,385.6

Taxes and fees -35.9 -38.7 -37.9 -41.8 -42.7 -44.5 -46.2 -45.9

Employee benefits -1,518.6 -1,558.1 -1,720.8 -1,737.6 -1,294.3 -1,313.5 -1,361.9 -1,412.1

Other -50.8 -58.4 -38.0 -36.2 -37.0 -38.5 -40.0 -39.7

Value of goods and materials sold -63.5 -63.6 -135.7 -38.6 -50.1 -54.6 -57.3 -57.2

Other operating expenses -160.2 -93.9 -60.2 -29.1 -41.3 -43.6 -45.9 -54.9

EBIT 417.6 344.0 110.2 61.5 397.1 507.9 576.1 477.0

Net financial activity -48.6 16.3 -9.9 -2.1 -4.9 -7.2 -3.9 -1.4

Share in profit of associates -0.5 -0.4 -13.4 0.0 0.0 0.0 0.0 0.0

Extraordinary items 0.0 -6.4 1.7 0.0 0.0 0.0 0.0 0.0

Pre-tax profit 368.5 353.5 88.5 59.5 392.1 500.7 572.2 475.6

Tax 43.1 -86.0 -23.1 -7.7 -74.5 -95.1 -108.7 -90.4

Net profit before minorities 411.6 267.4 65.4 51.7 317.6 405.6 463.5 385.2

Minority -0.3 0.2 8.7 -1.9 -1.9 -1.9 -1.9 -1.9

Net profit after minorities 411.3 267.7 74.0 49.8 315.7 403.7 461.6 383.3

EBITDA 927.6 766.8 499.0 435.7 823.8 974.3 1,088.8 1,040.1

EBIT margin 7.5% 6.6% 2.3% 1.4% 9.4% 11.3% 12.2% 10.2%

Net income margin 7.4% 5.2% 1.5% 1.2% 7.4% 9.0% 9.8% 8.2%

EBITDA margin 16.6% 14.8% 10.4% 10.3% 19.4% 21.8% 23.1% 22.1%

Source: BESI research for estimates, Company Data

Cash flow statement (PLN m) 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Net profit 411.3 267.7 74.0 49.8 315.7 403.7 461.6 383.3

Depreciation and amortization 510.0 422.8 388.8 374.2 426.7 466.4 512.7 563.1

Change in working capital -33.6 -68.2 1.9 -17.1 -1.3 -15.1 -13.8 -3.8

Change in inventories 6.3 11.7 6.1 8.7 -1.1 -5.1 -6.3 0.1

Change in receivables -188.7 85.1 3.0 67.8 1.5 -36.6 -35.7 1.0

Change in st liabilities 148.8 -165.0 -7.2 -93.6 -1.7 26.7 28.2 -4.9

Other, net -21.8 158.8 235.4 -87.8 13.4 7.4 4.2 3.4

Operating cash flow 865.9 781.2 700.2 319.1 754.6 862.5 964.7 946.0

Changes in tangible FA and intangibles -885.9 -739.2 -434.1 -582.4 -512.0 -591.7 -637.0 -633.5

Changes in company value 16.0 -10.2 18.0 -9.3 0.0 0.0 0.0 0.0

Other, net -242.5 81.5 44.8 371.3 -1.8 -1.8 7.7 12.7

Investing cash flow -1,112.4 -667.9 -371.4 -220.4 -513.9 -593.5 -629.3 -620.8

Equity issue proceeds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Change in interest bearing debt 198.9 29.2 -203.2 -15.0 -35.0 -30.0 -20.0 -15.0

Dividends 0.0 0.0 0.0 -137.5 -99.7 -157.9 -242.2 -277.0

Interests -7.7 -16.8 -6.1 3.3 -11.4 -7.2 -3.9 -1.4

Other, net -262.1 -82.2 -43.8 0.0 0.0 0.0 0.0 0.0

Financing cash flow -70.9 -69.7 -253.1 -149.2 -146.0 -195.0 -266.1 -293.4

Total cash flow -317.4 43.5 75.7 -50.6 94.6 73.9 69.3 31.8


Performance criteria 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Sales growth 16.7% -7.2% -7.3% -11.4% -0.3% 5.6% 5.1% -0.2%

EBITDA growth 64.6% -17.3% -34.9% -12.7% 89.1% 18.3% 11.7% -4.5%

EBIT growth 1402.8% -17.6% -68.0% -44.1% 545.2% 27.9% 13.4% -17.2%

Net profit growth 1202.1% -34.9% -72.3% -32.7% 533.6% 27.9% 14.3% -17.0%

Pay-out ratio 0.0% 0.0% 0.0% 185.7% 200.0% 50.0% 60.0% 60.0%

Effective Tax Rate 11.7% -24.3% -26.1% -13.0% -19.0% -19.0% -19.0% -19.0%

ROE 15.1% 8.6% 2.2% 1.4% 8.9% 10.7% 11.5% 9.2%

ROA 8.3% 4.9% 1.3% 0.9% 5.8% 7.1% 7.8% 6.3%


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Balance sheet (PLN m) 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Fixed assets 3,831.7 4,054.0 4,049.9 4,237.7 4,323.0 4,448.2 4,572.5 4,643.0

Intangibles 59.1 64.4 61.4 56.2 53.3 51.6 51.6 56.3

Tangible assets 3,496.1 3,807.1 3,855.4 4,068.8 4,157.1 4,284.1 4,408.3 4,474.0

Company value 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7

Investment property 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4

Investments in associates 67.1 60.5 38.2 47.5 47.5 47.5 47.5 47.5

Other financial assets 24.1 11.8 6.1 6.1 6.1 6.1 6.1 6.1

Other LT non-financial assets 6.6 2.0 1.4 1.4 1.4 1.4 1.4 1.4

Deferred tax assets 174.6 104.0 83.2 53.4 53.4 53.4 53.4 53.4

Current assets 1,538.6 1,569.8 1,676.2 1,151.4 1,245.6 1,362.9 1,475.8 1,506.4

Inventories 93.9 82.2 76.0 67.4 68.5 73.6 79.9 79.8

Other non-financial ST assets (accruals) 39.9 26.4 33.4 29.8 29.7 31.3 32.9 32.9

Trade receivables and other 693.2 612.6 609.3 541.5 540.0 576.6 612.3 611.2

Current tax receivables 1.5 1.5 2.4 2.4 2.4 2.4 2.4 2.4

Other financial ST assets 565.7 659.1 691.4 297.3 297.3 297.3 297.3 297.3

Cash and equivalents 144.5 188.0 263.7 213.1 307.7 381.7 451.0 482.8

FA available for sale 0.0 0.0 17.6 14.0 9.8 3.9 0.0 0.0

Total assets 5,370.3 5,623.8 5,743.6 5,403.1 5,578.4 5,815.1 6,048.3 6,149.4

Equity 2,990.5 3,214.7 3,508.9 3,423.1 3,641.1 3,888.8 4,110.1 4,218.4

Share capital 2,889.2 2,889.2 2,166.9 2,239.3 2,239.3 2,239.3 2,239.3 2,239.3

Reserve capital 102.8 122.8 692.8 618.8 618.8 618.8 618.8 618.8

Retained profit -87.7 159.9 603.2 517.1 733.2 979.0 1,198.4 1,304.7

Other 10.7 -29.3 -16.4 -16.4 -16.4 -16.4 -16.4 -16.4

Minority capital 75.5 72.1 62.4 64.3 66.2 68.1 70.0 71.9

LT liabilities 1,213.5 1,383.2 1,166.7 1,085.7 1,047.4 1,012.0 997.2 996.2

Loans and other interest bearing liabilities 125.6 193.1 121.6 183.3 165.3 151.8 142.8 133.8

Financial lease 479.7 418.9 313.1 237.1 222.9 208.6 199.1 194.4

Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

LT trade liabilities & other 65.2 151.8 113.7 87.3 81.3 73.6 77.3 90.1

Employee benefits related provision - LT 539.5 616.3 592.9 566.9 566.9 566.9 566.9 566.9

Other LT provisions 0.2 0.1 22.9 8.5 8.5 8.5 8.5 8.5

LT deferred tax liabilities 3.4 3.0 2.6 2.6 2.6 2.6 2.6 2.6

ST liabilities 1,166.3 1,025.9 1,068.0 894.2 889.8 914.3 941.0 934.8

Trade liabilities and other 801.1 682.1 675.8 582.3 580.6 607.3 635.5 630.5

Loans and other interest bearing liabilities 51.4 96.2 73.2 76.5 74.5 73.0 72.0 71.0

Financial lease 141.0 118.7 115.8 111.8 111.0 110.3 109.8 109.5

Bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Employee benefits related provision - ST 94.3 100.2 176.5 97.1 97.1 97.1 97.1 97.1

ST tax liabilities 4.2 0.9 0.2 0.2 0.2 0.2 0.2 0.2

Other financial liabilities 1.1 0.7 0.3 0.3 0.3 0.3 0.3 0.3

ST deferred liabilities 73.0 27.1 26.1 26.1 26.1 26.1 26.1 26.1

Total liabilities 5,370.3 5,623.8 5,743.6 5,403.1 5,578.4 5,815.1 6,048.3 6,149.4

Gross debt 797.7 826.9 623.7 608.7 573.7 543.7 523.7 508.7

Net debt 87.5 -20.3 -331.4 98.3 -31.3 -135.3 -224.6 -271.4

Net debt-to-equity 2.9% -0.6% -9.4% 2.9% -0.9% -3.5% -5.5% -6.4%

Net debt-to-total assets 1.6% -0.4% -5.8% 1.8% -0.6% -2.3% -3.7% -4.4%

Interest coverage ratio 34.4 18.0 13.8 17.1 33.9 41.4 44.8 38.3


Per share data (PLN) 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Shares outstanding (eop m) 2.889 2.889 43.338 44.787 44.787 44.787 44.787 44.787

Average number of shares (m) 2.889 2.889 9.631 44.425 44.787 44.787 44.787 44.787

EBITDA per share 321.1 265.4 51.8 9.8 18.4 21.8 24.3 23.2

EBIT per share 144.5 119.1 11.4 1.4 8.9 11.3 12.9 10.7

EPS 142.5 92.6 6.8 1.2 7.1 9.1 10.3 8.6

DPS 0.0 0.0 0.0 3.1 2.2 3.5 5.4 6.2

BV per share 1,035.1 1,112.7 81.0 76.4 81.3 86.8 91.8 94.2


of 22

Valuation Methodology

Described in PKP’s valuation section.

Risks to Fair Value

Prolonged challenging situation in Polish hard coal industry

Coal transportation occupies the main role in the company’s freight mix. While

we assume freight turnover in the segment to show a gradual decline in the

years ahead, any deterioration, or prolongation of the recent challenging

situation in the domestic hard coal industry might hit the firm’s top line and

earnings going forward.

Freight disruptions linked to intensified Polish infrastructure modernization

With its excessive rolling stock, PKP Cargo seems relatively well prepared for

the planned intensification of domestic rail infrastructure modernization going

forward. However, any major prolongation of renovation works at selected

lines might significantly affect the company’s freight speed and in extreme

cases result in losing clients.

Significant slowdown in Polish and/or EU macro recovery

The rail freight sector is highly cyclical. Any significant slowdown in the

forecast GDP growth in Poland and/or across EU in the years ahead might hit

the firm’s freight turnover dynamics, in the end affecting its revenues and

earnings (major operating leverage effect) going forward.

Weaker than originally forecast or significantly delayed rebound in Polish

construction sector

We expect the forecast dynamic recovery in the Polish construction sector

starting late 2015E (to be visibly supported by EU 2014-2020 budget

spending) to be one of the key drivers behind the firm’s freight turnover

forecast increase in the years ahead. Any significant delay in the rebound or

weaker than originally expected recovery in the sector might affect the

company’s future earnings.

Stronger-than-forecast pressure on service prices in Poland

Following the recent forced downward adjustment to Polish rail infrastructure

access fees, we expect PKP Cargo’s customers to push for the firm’s average

unit tariff to decrease. While in our base case scenario, we assume that the

company will have to share c. 60% of savings on lowered infrastructure access

costs going forward (to materialize in 2014E-2015E), any stronger pressure on

tariffs might affect its financial results going forward.

Unsuccessful acquisition

PKP Cargo announced it has signed a preliminary agreement to buy an 80%

stake in AWT, and the deal is expected to be finalized in the coming months,

according to the firm’s management. Among the main risks to our financial

forecasts for AWT and the deal in general we would point out: i) acceleration

of the decline of hard coal consumption in Czech Republic, as well as its

exports going forward; ii) material fall in lignite usage in Czech energy

generation mix in midterm; and iii) close cooperation of AWT with NWR,

dealing with liquidity issues. At the same time, both PKP Cargo and AWT

might face difficulties in realizing the expected synergies following conclusion

of the deal. We note that if the deal did not go through our FV for PKP Cargo

would fall to PLN 95.78.

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Dispute with trade unions

Employee benefit costs account for roughly one third of the firm’s total

operating expenditure, heavily boosting the firm’s operating leverage. At the

same time, the company’s trade unions seem relatively strong. Any potential

dispute with trade unions might result in a significant boost in overhead costs,

or temporary disruptions in operating activity, which in the end could affect

the firm’s financial results going forward. At present, the firm is facing two

collective disputes with its trade unions (they have a number of demands, of

which pay is the main issue). PKP Cargo’s management stressed it will make

efforts to solve the disputes in a way that guarantees the company's further

development.

Unexpected significant CAPEX needs

Rolling stock used in the rail freight industry requires significant CAPEX. On

the top of that, sector regulators might force some obligatory modernizations

(e.g. a hypothetical complete switch to mono-block wheel sets in the railcar

fleet), which could lead to unexpected capital expenditure. Any significant

unexpected boost in CAPEX needs going forward might harm PKP Cargo’s

balance sheet and lower the firm’s ability to distribute dividends. Investment

into 15 to 20 multisystem locomotives (cost of c. PLN 300m-400m), planned

by the company in the short-to-midterm, is factored into our latest CAPEX

estimates for PKPC.

Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.

PKP Cargo PKP PW

Report date Recommendation Fair value Share price

2014 July 28 Buy PLN 89.86 PLN 70.90

Source: Bloomberg, BESI Research

B

65

70

75

80

85

90

95

Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15

Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage

http://www.espiritosantoib.co.uk/

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IMPORTANT DISCLOSURES

220115

This report was prepared by BESI Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the financial group controlled by Novo Banco, S.A., a Portuguese bank authorised and regulated by Banco de Portugal (Portuguese Banking Regulator) and Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Authority), which was incorporated on the 3rd of August 2014 in the context of the resolution action taken on the former financial institution Banco Espírito Santo, S.A..

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Espírito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter.

Ratings Distribution

BESI Research hereby provides the distribution of the equity research ratings in relation to the total issuers covered and to the investment banking clients as of end of December 2014.

Explanation of Rating System Ratings Distribution

12-MONTH RATING DEFINITION

BUY Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months

NEUTRAL Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months

SELL Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months

As at end December 2014 Total BESI Research

Total Investment Banking Clients (IBC)

Recommendation Count % of Total Count % of IBC % of Total

12 Month Rating:

Buy 209 48.2% 31 91.2% 7.1%

Neutral 142 32.7% 2 5.9% 0.5%

Sell 80 18.4% 0 0.0% 0.0%

Restricted 3 0.7% 1 2.9% 0.2%

Under Review 0 0.0% 0 0.0% 0.0%

TRADING RATING DEFINITION

TRADING BUY Analyst expects a positive short-term movement in the share price (max duration 3 months from the time Trading Buy is announced) and may move out of line with the fair value estimate during that period

TRADING SELL Analyst expects a negative short-term movement in the share price (max duration 3 months from time Trading Sell is announced) and may move out of line with the fair value estimate during that period

Trading Rating:

Trading Buy 0 0.0% 0 0.0% 0.0%

Trading Sell 0 0.0% 0 0.0% 0.0%

Total recommendations 434 100% 34 100% 7.8%

For further information on Rating System please see “Definitions and distribution of ratings” on: http://www.espiritosantoib-research.com.

Share Prices

Share prices are as at the close of business on the day preceding publication, unless otherwise specified.

Coverage Policy

BESI Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. BESI Research has no specific policy regarding the frequency in which opinions and investment recommendations are released.

Representation to Investors

BESI Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material.

Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries.

All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, BESI Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are BESI Research present opinions only, and are subject to change without prior notice. BESI Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information.

BESI Research has not entered into any agreement with the issuer relating to production of this report. BESI Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents.

This communication has been issued and approved by Execution Noble Limited in the United Kingdom where it is being directed at persons who have professional experience in matters relating to investments. It is not intended for retail customer use.

Ownership and Material Conflicts of Interest

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates (including all entities within BESI Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion.

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates do not have any qualified shareholding (1% or more) in the issuers covered in this report. Bradesco has a direct qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM.

Pursuant to Polish Ministry of Finance regulations, we inform that neither does Banco Espírito Santo de Investimento, S.A. nor its Affiliates have any qualified shareholding in the Polish Securities Issuers mentioned in this report in excess of 5% of its total share capital.

Mr. Rafael Valverde, a member of the board of Banco Espírito Santo de Investimento, S.A., is a non-executive board member of EDP Renováveis.

Banco Espírito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers or market makers for Altri, Bradesco, Usiminas and Vale.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in share offerings of 4imprint, Alumetal, EDP, Klabin, Liberbank, Mota-Engil, Mota-Engil Africa, NAHL Group, NOS, Oi, PGE, Prime Car Management, REN, Skarbiec Holding and SKS Microfinance.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in the bond issues of the following companies: Abengoa, Altri, Bematech, EDP, Globe Trade Centre, Kredyt Inkaso, Mota-Engil and Sonae.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided in the last 12 months investment banking services to the following companies: 4imprint, Abengoa, Altri, Alumetal, Bematech, Brazil Hospitality Group, Burford Capital, Casino Guichard, EDP, EDP Renovaveis, Galp Energia, Globe Trade Centre, Inditex, IQE, Kcom Group, Klabin, Kredyt Inkaso,

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Kruk, Laird, Liberbank, Mota-Engil, Mota-Engil Africa, NAHL Group, NOS, Oi, Prime Car Management, REN, Semapa, Skarbiec Holding, SKS Microfinance, Sonae, Sonaecom, Sports Direct, SVG Capital and Ted Baker.

Affiliates of Banco Espírito Santo de Investimento, S.A. are partners to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil jointly with ES Concessões, S.G.P.S., S.A. (held by an Affiliate of Banco Espírito Santo de Investimento, S.A.) has created a joint holding company – Ascendi – for all stakes in transportation infrastructure concessions in Portugal and abroad. Banco Espírito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist.

Market Making UK

Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see “Execution Noble Limited UK Market Making” on http://www.espiritosantoib-research.com.

Confidentiality

This report cannot be reproduced, in whole or in part, in any form or by any means, without BESI Research’s specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Espírito Santo de Investimento, S.A.

Regulatory Authorities

Portugal: Banco Espírito Santo de Investimento, S.A. is regulated by the Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Authority); Spain: the branch in Madrid is regulated by the Comisión Nacional del Mercado de Valores (the Spanish Securities Market Authority); Poland: the branch in Warsaw is regulated by the Komisja Nadzoru Finansowego (the Polish Financial Supervision Authority); Brazil: BES Securities do Brasil, S.A. - Corretora de Câmbio e Valores Mobiliários is regulated by the Comissão de Valores Mobiliários (the Brazilian Securities Market Authority); United Kingdom: Execution Noble Limited is authorised and regulated by the Financial Conduct Authority; India: Espirito Santo Securities India Private Limited is regulated by the Securities and Exchange Board of India.

NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES OF AMERICA

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