Previously, we analyzed the three leaders of the American railway sector: Norfolk Southern Corporation, CSX Corporation и Union Pacific Corporation, and now it's the turn of their Canadian competitor - the Canadian National Railway Company, which St. Petersburg Stock Exchange 12 August admitted to the Russian auction.
About company
Canadian National Railway Company (NYSE: CNI) - a large Canadian transport company, founded in 1919. Main activity — railway transportation of goods. The railway network of the company is more than 19 500 route miles and connects the east and west coasts of Canada to the south of the United States.
The income of the Canadian National Railway Company consists of the transportation of eight groups of goods..
Intermodal transportation. Includes rail and road transport of goods and consists of domestic orders and international. The first are carried out within the United States or Canada, and the second go beyond the borders of one state.
Oil and chemicals. This segment includes the transportation of all kinds of chemicals., plastics, oil products, liquefied natural gas and crude oil. The main routes are the transportation of oil and gas from Western Canada to Louisiana and the delivery of petroleum products from Western Canada to the central part of the country.
Grain and fertilizer. The division depends primarily on crops grown and fertilizers, manufactured in Western Canada and the US Midwest. The segment carries wheat, oat, barley, rye, peas, lentils, corn, potash fertilizers, ammonium nitrate and urea.
Forest products. Various types of lumber, logs, panels, paper, including recycled, wood pulp and wood pellets. Transportation is carried out from all regions of Canada to the south of the USA.
Metals and Minerals. Transportation of equipment for the development of oil fields, iron ore, steel production, aluminum and other metals, construction and railway equipment. Key routes run from Canada Western and Eastern Canada to Chicago and Canada Eastern to Louisiana.
Coal. Transportation of bituminous coal, metallurgical coal and petroleum coke. Main routes: from Western Canada to Prince Rupert and from Central America to New Orleans.
Automotive products. Transportation of both finished vehicles, as well as spare parts and accessories for them.
Other income. Profits not from rail services, and, for example, transshipment and distribution of goods, automotive logistics, forwarding and transport management.
The structure of the company's income, million dollars
| Revenue | Share in the overall result | |
|---|---|---|
| Intermodal | 1037 | 29% |
| Oil and chemicals | 685 | 19% |
| Grain and fertilizer | 609 | 17% |
| Forest products | 451 | 13% |
| Metals and Minerals | 377 | 10% |
| Coal | 158 | 4% |
| Automotive products | 135 | 4% |
| Other income | 146 | 4% |
Purchase of Kansas City Southern
The main event of 2021 for the Canadian National Railway was the story of the unsuccessful purchase of Kansas City Southern.
begining. 21 May 2021 Canadian National Railway announced it will merge with Kansas City Southern (KCS). The deal initially promised to be very difficult, as companies needed to get approval from several regulatory bodies: Surface Transportation Board, the Federal Economic Competition Commission and the Federal Telecommunications Institute in Mexico.
Procedure. If all these bodies give their positive answer, then control of Kansas City Southern to the Canadian railway operator passes in two stages, which are tentatively ending in the second half of 2021 and the second half of 2022. After the first leg, the Canadian National Railway receives KCS shares in trust management, and after the second will be able to exercise actual control without restrictions, if the combined company passes additional checks.
Terms of the transaction. The entire Kansas City Southern company was valued at $33.6 billion. In accordance with the terms of the merger agreement, each holder of one KCS common share will receive 200 $ in cash and 1,129 ordinary shares of the Canadian National Railway.
Opt out of trades. Despite all prospects, 15 On September 2021, Canadian National Railway and Kansas City Southern announced they were terminating their merger agreement due to significant changes in the US regulatory framework, and also because of the competition executive order, which Biden published in July 2021.
Implications for Kansas City Southern. Kansas City Southern must remit $ 1.4 billion to Canadian company due to contract termination: 700 million - contract termination fee, another 700 million - return of the advance, which KCS used to terminate another deal - with Canadian Pacific.
Outcome. Unfortunately, the deal fell through, and we won't see a merged company, which was to become one of the world leaders in rail transportation, as it would connect the three largest economies in North America: USA, Canada and Mexico.
Profit distribution
Like the rest of the North American rail industry, Canadian National Railway is a company, which tries to distribute to shareholders the maximum possible profit, doing it through the payment of dividends and buyback.
For the last 10 years, dividend payments fell only twice: in 2014 due to a split of the company's shares 2 to 1, that is, in fact, the payment in 2014 turned out to be higher than the level of 2013, and in 2016 due to the strong growth of the US dollar against the Canadian currency.
Financial results
Canadian National Railway Company shows stable financial results, earning about USD 7 billion annually EBITDA. Even in the crisis year of 2020, the company's revenues did not fall and remained at the same high level.. Current 2021, probably, will also be no exception..
Wherein, looking at the results of a Canadian company and American competitors - Norfolk Southern Corporation, CSX Corporation и Union Pacific Corporation, - can be seen, that they are all behind their 2019 performance. This is partly attributable to Canadian National Railway's weak results in the automotive segment due to a shortage of semiconductors and the lagging of the oil and chemicals division., which in the second half of 2021 should add, according to management forecasts.
Financial results for the last 5 years, billion dollars
| Revenue | EBITDA | Net profit | net debt | |
|---|---|---|---|---|
| 2016 | 12,037 | 6,632 | 3,640 | 10,761 |
| 2017 | 13,041 | 6,851 | 5,484 | 10,758 |
| 2018 | 14,321 | 7,500 | 4,328 | 12,303 |
| 2019 | 14,917 | 7,529 | 4,216 | 13,732 |
| 2020 | 13,819 | 6,687 | 3,562 | 12,337 |
| 6м2021 | 7,133 | 3,519 | 2,008 | 13,150 |
Comparison with competitors
| EV / EBITDA | P / E | net debt / EBITDA | |
|---|---|---|---|
| Canadian National Railway | 13,51 | 20,59 | 1,85 |
| Norfolk Southern Corporation | 14,02 | 22,13 | 2,33 |
| CSX Corporation | 12,50 | 20,25 | 2,04 |
| Kansas City Southern | 19,42 | 30,01 | 2,40 |
| Union Pacific Corporation | 14,81 | 22,27 | 2,59 |
Arguments for
Increase buyback. After Canadian National Railway announced it was terminating its merger with Kansas City Southern, the Canadian company should receive additional funds in the amount of about 1.4 billion US dollars, which the company decided to return to its shareholders through buyback of shares. To this end, the railway operator announced an increase in the buyback to 5 billion Canadian dollars next year..
Moderate debt burden. Canadian National Railway has the lowest leverage compared to US peers, which allows the company to return the highest possible profit to shareholders. The company currently has a net debt of $13.15 billion., and the net debt / EBITDA multiplier is equal to 1,85.
Railway network. Canadian National Railway has access to seaports on two oceans: Pacific and Atlantic. This makes its network more diversified compared to US competitors., who work on one coast of their country: for example, Norfolk Southern Corporation and CSX Corporation - in the eastern, Union Pacific Corporation - on the western.
Arguments against
Low level of profit distribution. Canadian National Railway returned $1.286 billion to shareholders through dividends and buyback in the first six months of 2021 on a total company capitalization of $82.655 billion. In this way, profitability for the first half of the year was 1,6% against 3,9% у Union Pacific Corporation, 3,3% у Norfolk Southern Corporation и 2,2% у CSX Corporation.
In my opinion, the current low profitability can be explained by the company's desire to maintain financial stability before the deal M&A с Kansas City Southern, in 2022 this negative argument should go away due to the cancellation of the merger and the growth of the buyback.
New leader in the railway sector. That, what the Canadian National Railway intended, namely, the creation of the largest railway operator, which will use the infrastructure of the three leading countries in North America, sells its Canadian competitor. According to The Wall Street Journal, Canadian Pacific Railway signs deal to buy Kansas City Southern for $27bn.
What's the bottom line?
Canadian National Railway is a Canadian rail operator, which has one of the most diversified networks in the sector. Main driver of growth, like other companies in the industry, is the maximum return of profit to its shareholders, from which management is not going to refuse in 2022.
Canadian National Railway should appeal to long-term investors, as her business in the medium term, probably, will not undergo any changes. Ideally, considering adding a Canadian company to your portfolio is on a correction, preferably double digit price.
