Decent Top-line Growth aided by Higher Freight Rate: Canadian National Railway Co (TSX: CNR) is engaged in the rail, and related transportation business. The company has network of approximately 20,000 route miles spread across Canada and mid-America, uniquely connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico.

Major Highlights and Business Outlook: 

The company returned ~CAD3.2 billion to the shareholders during FY19, through dividends amounting to CAD1.54 billion and share buybacks of CAD 1.7 Billion.

During the year, the company made expansion within its track infrastructure capacity projects which includes 73 miles of double track, 2 new sidings. The year was marked by the inclusion of 154 new AC locomotives and 560 new grain hopper cars.

During December 2019, the Company acquired the intermodal temperature-controlled transportation segment of the Alberta-based H&R Transport Limited with a price consideration of CAD 105 million. The above acquisition will help CNR to expand its footprints across the moving customer goods division by offering more end to end rail supply chain services.

Outlook: For FY20, CNR expects its adjusted diluted EPS to grow at mid-single-digit from FY19 adjusted diluted EPS of CAD 5.80. The company anticipates low single-digit volume growth in terms of RTMs despite weak freight environment. The group is planning to invest in the West Coast to assist new business and expecting to take delivery of 41 new locomotives primarily during Q1 and 240 new grain hopper cars. The group is targeting FY20 free cashflow within the range of CAD 3.0 billion to CAD 3.3 billion, while dividend growth is expected at~7% on y-o-y basis.

Financial Highlights: For FY19, CNR reported revenue of CAD 14,917 million, up 4% on y-o-y basis. The increase in revenues was primarily driven by higher freight rate, addition of TransX in the intermodal commodity group followed by weaker Canadian dollars and higher volumes of petroleum crude which was partially offset by partly offset by lower volumes of a broad range of forest products, lower U.S. thermal coal exports. Revenue ton miles (RTMs) declined by 3% on y-o-y, while freight revenue per RTM was up 8% on y-o-y basis.. The company reported its net income of CAD 4,216 million, decline 3% y-o-y due to lower other income and higher operating expenses.

FY19Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: EV/EBITDA - Based Relative Valuation

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation: The stock of CNR is quoting at CAD 108.33 with a market capitalization of CAD77.35 billion. Going forward, the group is focusing on controlling its costs and resources in a disciplined manner in order to mitigate headwinds. The company is likely to leverage its unique three-coast network to enable a portfolio of diverse long-term growth possibilities at a low incremental cost. CNR is planning to upgrade its scheduled railroad to the next level with the implementation of advanced technologies. The company is a leading player within the logistics service segment and derives its revenue from seven commodity groups representing a diversified and balanced portfolio of goods transported between a wide range of origins and destinations. The business model is immune to the economic cycles and expected to grow moderately. Due to the recent decline in global equity, we believe investors should consider this large-cap player in order to diversify the risks. We have valued the stock using a relative valuation i.e. EV/EBITDA method and expect low double-digit upside. Hence, we consider a ‘Buy’ rating on the stock at the closing market price of CAD 108.33 as of 30 March 2020.

CNR Daily Price Chart (Source: Thomson Reuters)

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