Buy, buy Trencor — then good riddance
We seldom recommend shares in companies with a dismal track record. It is even more difficult to recommend shares in a company where the board and senior management have perpetually failed to meet expectations and have perennially underperformed.
In addition, the company has demonstrated a wilful disregard for the moral and commercial imperatives that underpin the need to transform. But, occasionally, the upside in a share is sufficient that negatives are more than discounted.
Trencor is such a company. The company is voluntarily liquidating and returning cash to shareholders. Its assets are primarily constituted by cash in US dollars. The net asset value of this company is R12.25 a share and the share price is R7.52. Essentially an investor is buying $1 and paying only US60c. Our calculations indicate an internal rate of return of 27% from now until the final liquidation.
Investors in Trencor can expect at least three distributions. Imminently, the unbundling of 3-million Textainer shares (worth R2.58 each), followed by a cash payment of R1.81 per share in June 2021 and a payment of at least R6.60 in June 2024 (based in current rand/dollar rates).
In addition to the above there is likely to be further cash available for a final liquidation dividend. Management have retained R117m for operating expenses to 2024. Incomprehensibly, they have retained a further $10m (or R1.06 a share) for what they describe as “unforeseeable expenses”. It is difficult to comprehend what those could be if the only asset is cash.
It is necessary to objectively examine the performance of a management team that has continually failed to deliver. The share price has materially underperformed. Its primary asset until recently, Textainer in the US, has proved to be a spectacular disappointment.
The price of Textainer is 50% below the initial public offering price in 2007. In that time the Dow Jones industrial average has doubled. The Trencor share price itself has underperformed. The price is 50% lower than five years ago.
Despite the dividend flow, the delay in receiving this cash is caused by the inexplicable decision of management to provide multiple indemnities. While Trencor management describe the possibility of any claim under these indemnities as “remote”, these indemnities are onerous and not properly explained. There is no mention of how the quantum was determined, nor can management properly identify the events leading to a claim. Hopefully, shareholders can be enlightened in this regard at the AGM.
A further material issue remains the composition of the Trencor board. As at December 31 2019, the board consisted of seven white male directors. There is not a single black or female person on the board or in senior management. Trencor was already listed on the JSE when Nelson Mandela was released from prison. Shockingly, it has failed to transform in the past 31 years. It is incomprehensible that shareholders have allowed this situation. The AGM is scheduled for June 4. It will be instructive to see whether institutional investors allow this unconscionable position to persist.
My thoughts on this matter are simple. Buy the share. Capture the significant upside. But do not continue to support this board or the management, who inexplicably enjoy the board’s support.