Description

I am recommending Trencor (TRE SJ) as a long. Trencor trades at a 25% discount to its intrinsic value which consists of cash and a 48% stake in Textainer (TGH US). Trencor management have committed to restructuring Trencor by the end of 2018 in order to unlock this discount.

What makes this trade even more attractive is that Textainer trades at a 19% discount to it’s book value while its major competitor Triton trades at a 1.3 times book. I believe favorable industry trends will help close this discount to book.

On a see-through basis Trencor trades at a 36% discount to it’s intrinsic value and investors get two bites at unlocking this discount and making money.

The Business Model

Before getting into the specifics of the trade I thought it would be useful to walk through the business model.

• Containers are bought from Chinese manufacturers. A new 20 ft container curently costs $2 200.

• Useful life of a container is 13 years.

• Generally used containers are sold for 40% of their original costs. The main driver of "new" and "second hand" values is the price of steal.

• Current rental rates are US70c per day. These a triple-net leases so the only costs Textainer incur is storage costs and repositioning costs when the container is off-lease. The repositioning costs are largely controlled by the terms of the lease which stipulate the return port.

• Leases are for 7 years. Trencor’s top customers include Maersk (19%), MSC (15%), Cosco (12%), CMA CMG (11%) etc

• Containers are normally funded 25% equity, 75% debt. Debt costs are currently 4% and maturities match the expiration of leases.

• At 70c per day the cash-on-cash return is 12% and the ROE=16%.

Textainer

A simplified balance sheet for Textainer is shown below. Book value per share is $20.77 and the share currently trades at $16.75.

Textainer trades at a PTB of 0.81 and EV/Capital Employed of 0.96. Triton, the largest competitor, trades at a PTB of 1.3 and an and EV/Capital Employed of 1.1.

Favorable Industry Trends

The following industry trends will support earnings momentum which should help narrow the discount and possibly shift the PTB ratio closer to Triton’s 1.3.

• World GDP is expected to grow by 4% this year. Trade usually grows by a multiple of GDP growth.

• Container utilization rates are high. Textainer’s utilization rate is currently 97.8% versus 94% in Q42016.

• Textainer’s fleet is under-rented and expiring leases can be re-let at a higher daily rate, currently 70c. If current rates persist Textainer could earn an additional $79mil per annum which will largely drop to the bottom line. This is a material increase given the current run rate in Revenue ($500mil) and PAT ($80mil) which I derived by annualising q12018's numbers.

• In 2016 Textainer added a net 80 000 TEU, and a further 187 000 TEU in q12018 which will help grow earnings given the 16% ROE. This should add $20mil to 2018 PAT.

• Net Income for q12018 was R20mil. I think the positive reversion and additional containers will boost q22018 PAT to $28mil.

• Clearly positive earnings momentum is on the side of investors which should help narrow the discount especially if Textainer reinstate the dividend.

   

   

  Trencor

   

  Trencor own 27.28mil (48.7%) Textainer shares. Trencor also own their own containers (TAC) which are managed by Textainer.

   

  Textainer reported it’s intrinsic value as at 31Dec2018. I have adjusted this value for changes in the USDZAR exchange rate and the decline in the Textainer price from $21.70 to $16.75.

   

  (All Trencor numbers are in ZAR. Current exchange rate is R12.26)

   

  

   

  Trencor has 177mil shares in issue which implies an intrinsic value of R44/share. Trencor shares are currently trading at R33 implying a 25% discount to it’s intrinsic value.

   

  If one uses Textainers book value per share of $20.77 then the see-through discount to intrinsic value is 36%.

   

   

  Catalyst

   

  On 2Jan2018 Trencor made the following announcement.

   

  “In relation to a possible simplification of Trencor’s interests, each of Halco, Halco Trust and Trencor has independently sought professional advice in exploring its own position, applicable local regulatory and legal considerations, as well as the best interests of its stakeholders in the various jurisdictions concerned, and will continue to do so. The processes involved are however complicated and require time to formulate and implement. Shareholders will be advised of further developments as appropriate.”

   

  My discussions with management indicate that they are looking at ways of unlocking value for Trencor shareholders which could include an unbundling of the Textainer shares or possibly the selling Textainer. They hope to complete the process by December 2018.

   

Conclusion

Trencor is trading at a 36% discount to it's see-through intrinsic value. There are two catalyst that should help narrow this discount and make you some money.

1) Restructuring Trencor

2) Textainer earnings momentum

Catalyst

1) Restructuring Trencor by end of 2018

2) Textainer earnings momentum, q22018 should show significant growth