Ann Crotty Writer-at-large
Picture: BLOOMBERG/KRISZTIAN BOCSI
Picture: BLOOMBERG/KRISZTIAN BOCSI

Trencor chairman David Nurek described 2016 as the most challenging year since 2009, when international trade slumped in the wake of the global financial crisis.

The group reported a trading loss of R1.9bn and lost its number one position in the global market for containers. For Trencor, the huge operational challenges faced by US-listed Textainer, in which it has a 48% stake, were made worse by accounting challenges.

The drastic slump in Textainer’s operational performance forced Trencor to record a R2bn impairment on Textainer’s fleet of 2.5-million containers. The US accounting standard, Generally Accepted Accounting Principles (GAAP), did not require Textainer to record this impairment but International Financial Reporting Standards, which regulates the accounting standards of JSE-listed companies, requires the impairment.

This requirement led to complex and time-consuming calculations that cost Trencor a whopping R80m in audit fees in financial 2016.

In April, the JSE warned Trencor that it faced suspension because it had failed to submit its provisional results (for the 12 months to December 2016) within the stipulated three months. Trencor responded with a Sens announcement informing shareholders it was not in a position to publish its provisional results "due to the onerous and time-consuming exercise in converting to IFRS the US GAAP-compliant results of the Textainer Group".

This difference became particularly onerous after the decline in market conditions during financial 2015, which continued into 2016.

Management attributed most of the R89m of "other operating expenses" in Trencor’s accounts to auditing expenses. The firm is developing software systems to ease future auditing challenges.

The auditing expenses were symptomatic of Trencor’s much greater problems in 2016.

Chris Logan of Opportune Investments says this once-dominant player seems to have been caught napping.

It lost the number one position when the number two and three players merged in what was regarded as a long overdue consolidation move to drive cost efficiencies in the overstocked global industry.

"Textainer should have been driving this process. Instead, it seems to have been caught flat-footed," said Logan.

Textainer’s letter to its shareholders described 2016 as possibly the most challenging year in its 37-year history, "with historically low new and used container prices and rental rates".

A difficult year became considerably more difficult in August, when Hanjin Shipping initiated the largest shipping line bankruptcy in history. At the time, Hankin was the seventh-largest shipping line in the world and Textainer had 6.4% of its fleet on lease to the company. By the end of February 2017, Textainer had recovered or was in the process of recovering 80% of the containers it had leased to Hanjin. It expects to recover at least 90%.

Things picked up in the second half of 2016, helped by the removal of Hanjin from the market. The positive trends that emerged in that period have continued into 2017.

"Higher new and used container prices, limited new container production, solid demand and higher rental rates are all helping us quickly reactivate containers recovered from Hanjin, maintain depot inventory at low levels and obtain better rental rates on new leases and lease renewals," Textainer told shareholders earlier in 2017.

At a recent results presentation Textainer CEO Phil Brewer told analysts the company’s expected return to profitability lagged its two main competitors because of its higher exposure to Hanjin, its high level of impairments and the structure of its financing facilities.

Trencor’s share price of R34.51 is off its 12-month low of R26.11, but remains significantly below the levels it has traded at for much of the past five years. According to Nurek, the share’s net asset value at the end of December was R31.37.

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