Description

Trencor (TRE SJ) is a cash shell trading at a 58% (70% upside) discount to book. Investors can expect three liquidation dividends. Information on the first dividend was announced today and will be paid soon. Even if the final liquidation dividend is received in December 2024 the IRR of 26% is still very attractive. Hopefully, the final dividend comes quicker than expected.

While this is a straightforward liquidation of a cash shell the final liquidation dividend has been delayed by issues related to the liquidation of a trust in Liechtenstein.  We have consulted broadly, including an expert network, on Liechtenstein laws and customs. The experts we have spoken to agree that the delay seems unusual. I am not a lawyer and I have never been to Liechtenstein. I am secretly hoping that someone on VIC can provide some for insights on the unusual delay which effectively shaves 20% off the NAV. 

Brief History

I don’t want to go into too much history as Trencor is currently a cash shell from which liquidation dividends will be paid.

Trencor is a holding company listed in South Africa. Before the decision to liquidate, Trencor owned

• 48% of Textainer (TGH.US) through a trust domiciled in Liechtenstein, the Halco Trust.
• The Halco Trust also owned a fleet of containers which were sold to Textainer for $60mil on December 31, 2019.

Valuation

In December 2019 Trencor unbundled the majority of its Textainer shares to shareholders. For a very technical reason Trencor retained 3mil Textainer shares.

Below is the NAV calculation. The NAV is currently ZAR12.18 versus the current share price of R7.17. Upside 70%.

Important notes

• Trencor have recently received approval to sell their 3mil TGH shares and the liquidation of these shares is imminent. The proceeds, representing ZAR2.81/share will be distributed to shareholders as a dividend.

• In December 2019 Trencor sold its containers to TGH for $60mil. A condition of this deal required Trencor to retain $16.2mil warranting that the containers sold to Textainer were owned by Trencor. The warrantee expires in June 2021. Most of the containers have been managed by Textainer and as a result we do not foresee any calls on this warrantee.

• Trencor need to retain $62mil to back an indemnity given to the Trustees of the Halco Trust. I will discuss this important swing factor in more detail below.

• The liquidation costs are expected to be ZAR33mil for 2020 and then ZAR21mil per annum for the remaining 4 years.

• Tax. A withholding tax of 20% will be levied on all the dividends. As these costs can be circumvented using CFD’s or Futures I have not included these costs in the calculation. Also, foreign shareholders are not subject to this withholding tax. 

Some more on the upside?

The table below shows how the upside changes as the dividends are paid assuming that the current discount remains the same.

• Div1 represents the dividend from the imminent unbundling of the 3mil Textainer shares.
• Div2 represents the dividend that will flow following the expiry of the $16mil Textainer warrantee in 2021.

As the dividends are paid the discount grows from 70% to 116%. By the time Div2 is paid, investors are paying $2,54 for $7.57 of cash.

IRR

The cash flows generate an IRR of 26%. Note that investors will receive ZAR781mil of the liquidation dividend by 2021.

Liechtenstein Trust

Trencor held their 48% stake in Textainer and their own fleet of containers through the Halco Trust. This a discretionary Trust based in Liechtenstein which Trencor has used 40 years. Trencor is the nominated beneficiary of the Trust.

To eliminate a persistent holding company discount Trencor decided to unlock the discount by selling and distributing its assets to shareholders. The first step in this process was to get the Trust to distribute its assets to Trencor. This is when the problems started. The trustees demanded a cash backed indemnity until December 2024 before authorizing the distribution of the assets to Trencor.

Initially the trustees wanted a cash backed indemnity for the entire value of the distribution. A rough estimate of the initial indemnity is $350mil. Let’s look at this again as it still does not make sense to me. The beneficiaries have to provide a 5-year cash backed indemnity for the entire value of the distribution! If this is true how is it practically possible to run a Trust through Liechtenstein? Has anybody seen or heard of anything this crazy? To be honest, I must pinch myself every time I read this. I thought that Swiss banker in “Wolf on Wallstreet” was a piece of work, but to experience this in real life is surreal.

The Trencor management team managed to negotiate the $350mil down to $62mil. The expert network I consulted still think this is an unusually high especially since the beneficiary and recipient are the same person. Unbelievably, when management are asked to substantiate the $62mil they openly admit that it is a number plucked out of thin air which the Trustees are not able to articulate. Again, if anybody can shed any light on this, I am all ears. Also, the indemnity has been signed and one has to consider whether it can be unwound.

I want to make a few points on the liability

• Trencor have investigated this matter and cannot find any evidence of a liability. At last year’s AGM, I asked every director to go on record confirming that they knew of no issues which could trigger a liability.
• Trencor describe the liability as “remote” in all the official communications to shareholders.  
• The Trust was not very active and is simple to understand. The only transactions were dividends flowing from Textainer, which were then paid to Trencor. That’s it!
• We have discussed the potential of a tax liability with tax consultants. As Trencor never had to pay tax on the dividend in the first place there was no need to set up an avoidance structures which could trigger a tax liability.
• Trencor released their 2019 audited results a few weeks ago. The potential liability has not been disclosed on the face of the balance sheet. It is only described in a note as a contingent liability. This disclosure serves as a second opinion from the auditor confirming that the potential of a liability is remote.

The Bribe

Trencor where hoping to release the $62mil using an insurance policy to cover the potential liability. Lloyds Insurance offered to underwrite this risk, but, the Trustees rejected this option.

The trustees do have an umbrella policy indemnifying them from potential liabilities. Trencor tried to offer the Trustees cold hard cash (“the bribe”) which the trustees could use as they wished. They could choose to top-up their existing insurance, or, alternatively use the money to spoil themselves with jewelry and sports cars. This approach, although not formally rejected, seems to have faded.

Conclusion

The delay is costing ZAR126mil in unnecessary costs and ZAR300mil in time value using the South African 5-year bond yield. Again, without these costs the return is significantly higher, and I look forward to insights from members who are familiar with Liechtenstein laws and customs.

Otherwise the significant discount to cash offers investors a very attractive return with no downside. 

Catalyst

Liquidation dividends