Canadian National Railway overview : new Canadian railway operator on the St. Petersburg Stock Exchange

Обзор Canadian National Railway: новый канадский ж/д оператор на СПб-бирже

Earlier, we took apart three leaders of the American rail 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 - rail 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.

Canadian National Railway Company revenues consist of the transport of eight groups of goods.

Intermodal transportation. Includes rail and road transportation of goods and consists of domestic orders and international. The first are carried out within the United States or Canada, and the latter go beyond the borders of one state.

Oil and chemicals. This segment includes the transportation of all kinds of chemicals, plastics, petroleum 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 oil products from Western Canada to the central part of the country.

Grain and fertilizers. The division depends primarily on crops and fertilizers, produced in Western Canada and the Midwest of the United States. 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 Western and Eastern Canada to Chicago and from Eastern Canada to Louisiana.

Coal. Transportation of bituminous coal, metallurgical coal and petroleum coke. Main routes: from Western Canada to the port of Prince Rupert and from Central America to New Orleans.

Automotive products. Transportation of both finished vehicles, and spare parts and components for them.

Other income. Profit not from rail services, but, eg, transshipment and distribution of goods, automotive logistics, forwarding and transportation management.

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Обзор Canadian National Railway: новый канадский ж/д оператор на СПб-бирже

Обзор Canadian National Railway: новый канадский ж/д оператор на СПб-бирже

The structure of the company's income, million dollars

Revenue Share in the total 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 merger with Kansas City Southern (KCS). The deal initially promised to be very difficult, as companies were required to obtain approval from multiple 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 is transferred in two stages, which are tentatively completed in the second half of 2021 and in 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.

Cancellation of the deal. Despite all the prospects, 15 September 2021 Canadian National Railway and Kansas City Southern announced termination of the 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 - refund of the advance, which KCS used to terminate another deal - with Canadian Pacific.

Outcome. Unfortunately, the deal fell through, and we will not see the merged company, which was supposed to become one of the world leaders in railway transportation, as it would connect the three largest economies in North America: USA, Canada and Mexico.

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Обзор Canadian National Railway: новый канадский ж/д оператор на СПб-бирже

Profit distribution

Like the rest of the North American rail sector, 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.

Обзор Canadian National Railway: новый канадский ж/д оператор на СПб-бирже

Обзор Canadian National Railway: новый канадский ж/д оператор на СПб-бирже

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, also will not be an exception.

Wherein, if you look at the results of a Canadian company and American competitors - Norfolk Southern Corporation, CSX Corporation и Union Pacific Corporation, - you can see, that they are all lagging behind their 2019 performance. This is partly due to the Canadian National Railway's weak performance in the automotive segment due to a shortage of semiconductors and a lagging 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 breaking up its merger with Kansas City Southern, the account of the Canadian company should receive additional funds in the amount of about $ 1.4 billion, 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..

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Moderate debt burden. Canadian National Railway has the lowest debt burden of its American competitors, which allows the company to return the highest possible profit to shareholders. The society currently has a net debt of $ 13.15 billion., and the net debt / EBITDA multiple is 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 American competitors., who work on the same coast of their country: eg, Norfolk Southern Corporation and CSX Corporation - in the east, Union Pacific Corporation - in the west.

Arguments against

Low level of profit distribution. Canadian National Railway returned US $ 1.286 billion to shareholders in the first six months of 2021 through dividends and buybacks for a total company capitalization of US $ 82.655 billion. In this way, profitability for the first half of the year was 1,6% vs 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 buyback.

New leader in the railway sector. Then, 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, sold by its Canadian competitor. According to The Wall Street Journal, Canadian Pacific Railway signs agreement to acquire Kansas City Southern for US $ 27 billion.

What is the bottom line

Canadian National Railway is a Canadian railway operator, which has one of the most diversified networks in the sector. Main driver of growth, like other companies in the industry, - this is the maximum return of profit to its shareholders, from which the management is not going to give up even in 2022.

Canadian National Railway should appeal to long-term investors, since her business in the medium term, probably, will not undergo any changes. Ideally - considering adding a Canadian company to your portfolio is a correction, preferably at a double-digit price.

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