Sailing into calmer waters?
Textainer has had a monster run thanks to a global shipping boom. But former parent Trencor remains a frustrating play
For longtime Trencor shareholders it might be the best of times and the worst of times.
Last week shareholders rejoiced as container leasing specialist Textainer, which was unbundled from Trencor in 2019, confirmed a longawaited turnaround with record quarterly results.
At the same time, Trencor shareholders, and one particularly irate backer, would have been frustrated at news that the group’s cash pile of more than R1.1bn remains locked up in complicated legal agreements for the foreseeable future.
Trencor is a cash shell, and one in which investors have now scored handsomely in terms of the Textainer unbundling, but its AGM last week was a torrid affair.
Frustrated shareholder Nic Krige and chair David Nurek clashed over the legal obstacle to shareholders being paid out the remaining cash holding in the company. Krige was at several points threatened with being shut out of the meeting.
The root of events at the AGM lies in legacy structures in the old Trencor that have now come back to haunt the group at a time when shareholders really should be enjoying the fruits of an unbundling and value-unlocking process.
Trencor was, until recently, the largest shareholder in New York Stock Exchange (NYSE)-listed Textainer. All Trencor’s shares in Textainer, which were worth around R4bn at the time, have been unbundled, and the group has also paid a R275m special dividend from its cash pile.
Trencor’s unbundled Textainer shares are now worth over R10bn — a nifty gain for shareholders that retained the stock.
At this point Trencor sits with cash or near cash of R1.16bn, which equates to about 668c a share (roughly double the current share price). That is a huge discount on a liquid NAV. However, the cash is not unencumbered, as there are still complex indemnities in place involving the Halco Trust.
Halco was a holding company controlled by the Jowell family (which founded Trencor back in 1929) that sat between Trencor and Textainer, and was put in place back in the days when SA still faced trade sanctions because of apartheid.
Textainer, in fact, was regarded as one of the original rand hedge shares on the JSE, thanks to its ability to earn income in dollars.
Halco first came to the fore in 2009, when shareholder activists raised questions about the Trencor control structure at an AGM. At the time, Theo Botha argued that Trencor could have adapted a more straightforward control structure.
Trencor vs Textainer – weekly Based to 100
The then Trencor chair, Neil Jowell, was hardly forthcoming about details about Halco, but indicated there were “trade secrets” in Halco as well as “significant trade benefits”.
To cut a long (and complex) story short, Trencor, before unbundling its Textainer holdings, was required to provide an indemnity for $62m (R875m) to the Halco Trust. The indemnity terminates at the end of 2024, and until that time Trencor is contractually required to retain sufficient cash and other liquid assets to match the maximum potential exposure under the indemnity.
The problem is that the exact concerns about possible claims against the Halco Trust are still not clear. Unhelpful, considering that the 2019 annual report was at pains to insist that had Trencor not provided the Halco Trust indemnity, and had the Halco Trust indemnity not been so reduced, none of the major milestones in the simplification process that it had achieved, including
the distribution of Textainer shares, “would have been possible”.
The bottom line is that the bulk of Trencor’s cash holding is locked up until the end of 2024 unless Trencor’s board can negotiate either an abridged time frame or a smaller indemnity amount with Halco.
Nurek advised the AGM that there has been no advance on the position of the indemnity since the release of the latest annual report.
Krige was livid at the impasse, suggesting Trencor had been badly advised on the terms and the quantum of the indemnity. He was also puzzled at the lack of clarity about potential claims against Halco, even asking how Trencor did a “due diligence” if the nature of the indemnity issues remained a mystery.
Nurek noted that Krige had raised the same points at two previous AGMs, and disputed that Trencor was incorrectly advised. “It’s history … it’s done,” he said.
He countered that the legal team had done a “terrific job” in negotiating the indemnity at below $62m.
Krige then took issue with Nurek’s chair package of R700,000 a year. “What are you doing for that money? The company is a cash shell.”
Krige also pressed Nurek on whether directors were aware of any liabilities that could trigger the indemnity, or why the trustees of the Halco Trust might think there might be a future claim.
Nurek said no claims had been received to date from Halco, and that he was not willing to speculate on the matter: “I have no idea what claims might arise.”
Krige asked if it was not possible to whittle the indemnity down to $10m, or put an insurance policy in place to cover potential claims.
All Nurek would say was: “We will keep knocking at the door. Hopefully one day they will open it and reduce either the quantum or the timeframe for the indemnity.”
That wasn’t good enough for Krige, to the point that Nurek threatened to mute his further participation in the AGM.
Yet the hoo-ha at Trencor’s AGM seems petty, if not spiteful, when considering the value uplift achieved through Textainer’s stunning quarterly performance.
Textainer has been in the doldrums for the past few years; its underperformance (against its peers) was compounded by its exposure to the collapse of Hanjin Shipping in August 2016.
Fast-forward to 2021, and adjusted net income for the first quarter topped $59.2m, compared with $41.1m for the fourth quarter of 2020. Container utilisation averaged 99.6%, and has since edged up to 99.7%, according to CEO Olivier Ghesquiere.
It explains why Textainer has had a phenomenal run in the past year, gaining a cool 184% on the JSE.
Textainer has benefited not only from robust trading conditions and elevated container demand but also from an optimised financing structure.
The turnaround is welcome, and speaks volumes about the new executive team.
In previous years Textainer lagged its main rivals, especially NYSE-listed Triton. It took much flak over its executive teams’ incentive structures, most notably where incentive payments were made on achieving just 50% of budgeted performance.
Now the new executive team must achieve 80% or more of budget to earn incentive payments.
But there are still some outstanding issues that could bother shareholders, particularly the “poison pills” that discourage a takeover of Textainer and preclude shareholders from taking legal action against officers and executives.
In the meantime the more immediate fretting at the investors’ conference call last week revolved around how long these robust trading conditions would last.
This is a critical concern, as Textainer is investing heavily for future growth, taking delivery of containers valued at $580m during the first quarter and ordering another $700m of containers for delivery in July.
Ghesquiere says most of these containers are already on attractive long-term leases or committed to them. He adds that the average lease tenure of all contracts negotiated so far this year is more than 12 years.
Ghesquiere notes that from July 2020 to July 2021 Textainer has invested $2.2bn in new containers that will provide strong cash flow and attractive revenue over the medium term and boost improvements in profitability.
“This is a significant investment volume, representing 45% of our container asset value as of the beginning of this period. At the same time, we continue to support our historically high utilisation rate by successfully renewing expiring leases under long-term arrangements that guarantee most containers will remain on lease until reaching their sales age, further securing our stable future cash flow.”
No surprise, then, that Textainer’s board has also authorised an increase in the share buyback programme for an additional $50m of the group’s outstanding shares. A resumption of dividends was mooted too.
Ghesquiere maintained that current trading patterns should hold, noting the increased demand from online shopping and seasonal demand stemming from the summer months in the northern hemisphere.
“When does it end? The timing is hard to predict. We are predicting that demand of new containers will ease off at the end of the year. But we will have a soft landing, as we should continue to see demand in a market that is not oversupplied with containers.”
It seems likely that further gains at Textainer will ease frustration at a delayed payout at Trencor, especially if the container group starts kicking out dividends again.
But for those hedged solely on Trencor’s heavily discounted cash pile, it’s probably best not to hold your breath.
We should continue to see demand in a market that is not oversupplied with containers
Olivier Ghesquiere