PICK OF THE MONTH
THE push by Trencor for an inward listing of its controlling stake in New York Stock Exchange-listed container leasing specialist Textainer on the JSE is a welcome development.
By all accounts deliberations in this regard should be finalised by year the end of the year — a development that will hopefully coincide with an improved profit performance.
Textainer is the world’s second-largest container leasing company. It was previously the biggest, but its reluctance to embark on corporate action meant that Triton emerged as the big dog (after merging with rival TAL in mid-2016).
Some punters would argue that size does not matter. But in Textainer’s case size is a critical issue, as Triton has emerged as the top-rated container leasing company by a fair stretch.
Textainer’s share price has been under water in the past 18 months, though the company has admittedly been rocked by the sinking of the Hanjin shipping line. Long-time Trencor shareholder Chris Logan, speaking at the company’s AGM last month, noted succinctly that Textainer was once the “Rolls-Royce” of the container leasing sector but now was viewed as the “Beetle”.
Some of the statistics published in Textainer’s most recent quarterly update are telling. Its price to net asset value (NAV) was 0.8 times — well behind those of Triton (1.9 times) and CAI (1.1 times). That Textainer’s presentation openly discloses this lag might suggest that directors are confident that the company can play catch-up in the short to medium term.
Indications are that container leasing rates have firmed, but the critical question is the timing of Textainer’s acquisition of new containers, which was initially restrained in terms of borrowing powers after the Hanjin disaster.
Triton and CAI have been more active in buying containers than Textainer in recent quarters, though Trencor chairman David Nurek gave the reassurance that the company has now entered the new container market with vigour.
The inward listing of Textainer seems a fait accompli, judging by the body language of the Trencor directors
The inward listing of Textainer seems a fait accompli, judging by the body language of the Trencor directors at the AGM. The mechanics of the unbundling might throw out a few permutations, however.
The obvious proposal would be to unbundle the Textainer stake to Trencor shareholders. But there is a question of how Trencor will deal with its other assets. A value breakdown at the end of December 2016 shows that Textainer accounted for about R15.60/share of Trencor’s NAV of R31.57/share. But the investment in specialist container company TAC is worth more than R1bn (around 600c/share) and there is also cash of about R1.6bn (worth R840c/share) and other assets of R238m (135c/share).
First prize would be for Textainer to take aboard the stake in TAC with the cash presumably easy to distribute to shareholders in form of dividends (until the Trencor shell can be dismantled and delisted from the JSE).
In truth, the inward listing of Textainer is a necessity, and a rather urgent initiative in terms of cutting unnecessary costs and avoiding frustrating delays in issuing financial results.
These costs and delays are caused by confounding circumstances that require Trencor to convert US Gaap (generally accepted accounting principles) to IFRS (international financial reporting standards). It has meant that Trencor has struggled to produce financial results by stipulated JSE reporting deadlines. Consequently the company’s shares have been under threat of suspension by the bourse.
The auditing procedure is Kafkaesque. To be able to finalise the depreciation of fleet and impairment numbers in the audited financial statements to meet IFRS guidelines, independent auditors need to be engaged to survey Textainer’s 2.5m-strong container fleet. Each container is assessed individually — an auditing task that was euphemistically described by Trencor’s directors as a “dynamic model”.
The bottom line is that it costs Trencor tens of millions of rand to produce the depreciation and impairment figures. The “importance” of these figures was sarcastically underlined by Nurke at the AGM when he asked the assembled shareholders: “Hands up, who looks at these two figures?”
Reshaping the Trencor/Textainer structure should immediately unlock value for shareholders. Of course, the X factor is whether Textainer, which will no longer have an anchor shareholder, might in its state of relative operational vulnerability be more susceptible to corporate action.
At this delicate juncture reckons Trencor is a share worth tucking away.