Trencor is staying afloat

The company is one of the JSE's purest rand hedges by virtue of its 49,94% holding in Textainer, a container leasing specialist listed on the NYSE Euronext.

Trencor, which, at times, has traded at a premium to its underlying investment, has run strongly since late 2011 as Textainer consolidated its market-leading position. But further growth might be muted after remarks by Textainer's chief executive Philip Brewer during a recent first-quarter presentation.

With container utilisation rates at Textainer slipping only 1,1% to 95,5% there seems little to fret about. But it was Brewer's allusion to softer-than-expected demand and yield compression (market over-capacity suppressing prices) that seemed foremost on the minds of shareholders at Trencor's AGM last week.

Shareholder Chris Logan, representing Opportune Investments, pointed out that Textainer's results for the first quarter showed net income per share falling 16,5% compared with competitor TAL's 14% increase. Logan asked hopefully: "Is there a chance Textainer could play catch-up with its largest listed competitor?"

Trencor chairman Neil Jowell said it was fair to say competitors were closing the gap on Textainer. But he stressed competitors were coming off a higher cost base and lower volumes. "Textainer has always been committed to being best in class," Jowell said.

Restrained growth

Textainer's restrained role in the current consolidation of the international container sector was also questioned at the AGM - a fair inquiry since Textainer raised fresh funding late last year by placing new shares with new investors.

Logan argued that larger and well-established companies like Textainer should have "superior scope" to extract synergy and savings from merger and acquisition activity.

It seems most of the corporate action in the container sector is being driven by private equity investors and specialised investment companies. This activity may even raise concerns around a "bubble", considering the earlier comments around over-capacity in the container market.

A recent transaction that might raise eyebrows involved the Ontario Teachers' Pension Plan acquiring SeaCube Container Leasing in a deal that inferred an enterprise value of around US$1,8bn (R18bn) for Textainer's closest rival.

Trencor non-executive director David Nurek pointed out that private equity companies had access to funds at low rates. "They are also focused on a short time frame, maybe five to seven years. Textainer looks at what an acquisition will earn over the next 14 or 15 years."

Market dynamics

Trencor executive director Hennie van der Merwe said it was important to note that none of the big acquisitions was being undertaken by large companies.

"Textainer does bid and is not sitting on the sidelines. But the company gets outbid by the money bags for returns that are ridiculously lower than the return from Textainer. The sums don't work," he said.

Van der Merwe added that he hoped the new investors would revert to Textainer when deciding to exit their investments.

Should Textainer latch onto any inspiring opportunities, one of the key questions would be whether Trencor would agree to a dilution of its interest in the company to facilitate a scrip settlement option.

Last year Trencor offered a parcel of shares to new investors as part of a fund-raising exercise at Textainer, reducing its effective stake from 60% to just below 50%.

While some Trencor shareholders may initially have quibbled about the (low) price the shares were sold at, there is no doubt the additional liquidity has boosted Textainer's trading volumes and, ultimately, its price on the NYSE Euronext.

Dividends

Jowell suggests Trencor - which earlier this year paid a sumptuous special dividend from the proceeds of the Textainer share sale - would not be keen to dilute its stake further. "We like our current shareholding."

It speaks volumes for the robustness of Textainer's business model if Jowell, whose family started Trencor as a transport business in Springbok over 80 years ago, is determined to clutch onto the international container group.

Selling more Textainer shares at current prices could make sense, considering the slim chance this shareholding will ever be unbundled to Trencor shareholders (at least in the short- to medium-term).

The operational waters may be trickier to navigate, but it's probably best for shareholders to stay on board.

Source: Financial Mail via I-Net Bridge