Concern as Trencor share price stumbles
Looking past improved operational performance, there remains a worry around increased competition
Shares in seaborne logistics hub Trencor took a serious beating last week. At one point the shares plunged more than 10% to reach an intraday low of R30.
They settled at R33, 15% down on the R39 reached on May 8 and well off the 12-month high of R52 registered in December.
As its mainstay investment Trencor holds a 48% stake in container-leasing firm Textainer, which is listed on the New York Stock Exchange.
The share-price plunge ironically coincided with Trencor releasing a NAV calculation for the end of December. That calculation pencilled in a value of R7.3bn for the Textainer stake, equivalent to R41.35/share. But there is also a R1bn value accorded to specialist container group TAC (worth R5.67/share), cash of R1.01bn (R6.19/share) and other assets worth R1.95m.
Trencor’s end-December NAV was about R54/share, considerably higher than the company’s average share price over the past 16 months.
What really appears to have sent shudders through the shareholder body was the release of Textainer’s first-quarter results for the 2018 financial year, despite the executive commentary on the first-quarter performance reflecting a bright and breezy tone.
Lease rental income increased 3% to US$120m and net income came in 9% higher at $18.7m. Utilisation averages improved slightly to 97.8%, and new containers worth $428m had been either ordered or received.
In his commentary, Textainer CEO Philip Brewer said Textainer’s performance continued to benefit from steady investment in new containers and favourable market conditions.
He added: "Though the first quarter is traditionally our industry’s weakest quarter, fundamentals remained strong. New container prices and lease yields are stable at attractive levels."
Brewer noted that Textainer has been taking advantage of attractive market conditions by continuing its planned investment in new containers.
Of the $428m-worth of new containers, most are already on lease or committed to be picked up by the end of June.
More encouraging was Brewer’s disclosure that the average rental rate for these new containers is significantly above the average rental rate of Textainer’s existing fleet.
"We are heading into the traditional peak season with great momentum and are well positioned to accommodate the growth and needs of our customers," he said.
Textainer’s conference call with investors also threw up no real misgivings — unlike previous calls, which were more fractious affairs.
Still, the scoreboard will show that Textainer’s share price, sitting pretty at $21.85 at the end of December, has skittered down to $16.80.
Looking past the improved operational performance and rosier trading outlook, a persistent worry remains around increased competition in the container-leasing sector.
Textainer was, until only a few years ago, the largest container-leasing firm in the world.
But corporate action has resulted in larger container-leasing firms being created, and it seems Textainer now ranks as the third-largest.
Textainer has studiously avoided corporate action, preferring to invest in its own operations by expanding its container fleet.
Triton International, on the other hand, appears to be making the most of its status as the world’s largest container company by churning out exceptional performances. Triton, which merged with TAL International in 2016, recently reported first-quarter adjusted net income of $79.8m — an increase of 17% from the fourth quarter.
Triton’s directors are also optimistic for the full financial year ahead, and have to date ordered $850m of containers for delivery in 2018.
The projected lifetime equity returns for new-lease transactions secured by Triton are in the mid-teen range, with an average initial lease duration of more than seven years.
Triton’s shares, by contrast to those of Textainer, have charted north strongly in the past few weeks.
One of the major differences between Triton and Textainer is that the former pays regular dividends and the latter has not declared a dividend since the later part of 2016.
This might have longer-term implications for Trencor, which for now can afford to pay dividends from its large cash pile.
So, after the share price rout of last week, is Trencor worth a look for long-term bargain hunters? If we use Textainer’s latest share price, the value to Trencor is about R5.5bn (compared with R7.3bn at the end of 2017), equivalent to about R30/share.
Assuming the other components of NAV are roughly the same, an updated NAV of about R42/share might be assumed. This means Trencor was trading at a premium to its holding in Textainer at the time of writing, but at roughly a 15% discount to an updated NAV.
This seems a fair discount for a holding-company structure in which Trencor shareholders effectively need to accommodate two layers of management — remembering Trencor has its own board of directors — and in which the prospects for unbundling the shareholding in Textainer still seem some way off.
Watch and wait.