Textainer TGH
March 21, 2015 - 4:46pm EST by
bafana901
2015 2016
Price: 30.63 EPS 3.32 3.09
Shares Out. (in M): 57 P/E 9.2 9.9
Market Cap (in $M): 1,750 P/FCF 0 0
Net Debt (in $M): 2,990 EBIT 263 0
TEV ($): 4,640 TEV/EBIT 17.6 0

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  • Arbitrage
  • South Africa
  • Small Cap
  • Emerging Markets

Description

 

I am recommending an arbitrage trade to take advantage of a 22% mispricing gap. The recommendation is to go long Trencor (TRE SJ, listed in South Africa) and to short Textainer (TGH US). Trencor owns 47.97% of TGH.

 

The Arbitrage Gap

 

Inputs

Trencor Share Price (ZAR)                            ZAR 59.00

USDZAR                                                               12.03

TGH Share Price (USD)                                   $30.63

 

Trencor NAV

Trencor asset include

·         A 47.97% (27.28mil shares) ownership in TGH. TGH owns 2.3mil TEU containers. Currently worth ZAR 10 039mil

·         Cash equal to ZAR1 785mil.

·         A Long Term Receivable of ZAR565mil.

·         An effective 100% ownership in TAC which owns 176k TEU containers. Most of these containers are managed by TGH. The investment is worth ZAR466mil.

·         There is a small liability of ZAR113mil.

 

The NAV of Trencor is ZAR 12 742mil.

 

TGH Share Price ($)

            30.63

USDZAR

            12.02

 #Shares Owned by Trencor

            27.28

 Value to Trencor's 47.97% interest

          10,039

 TAC

               466

 Long Term Receivable

               565

 Cash

            1,785

 Net liabilities

             (113)

 Net Asset Value

          12,742

 

Trencor has 177mil shares in issue. At he current market price of ZAR59.00 Trencor's market cap is ZAR10 448mil. This implies that the NAV exceeds Trencor’s current market cap by 22%.

 

 

The History of the Arbitrage Gap

 

The arbitrage gap calculated on the same basis as above is shown in the chart below. It ranges between a 30% premium to market cap to a 10% discount to market cap. 

 

As the NAV is currently trading at a 22% premium history suggests that there is still room for the trade to move against you. As a result I am not recommending a full position now and I plan to trade around the position. Increasing the bet as the gap widens and decreasing the bet as the gap narrows.

 

 

 x

 

 

 

The Trade

 

There are two possible trades which can be considered.

 

Trade 1

Buy Trencor for ZAR10 448mil and short 27.28mil TGH shares worth ZAR10 039mil. This means that one is effectively buying the stub valued at ZAR2 703mil for ZAR409 mil.

The ZAR2 703mil stub will be sensitive to fluctuations in the exchange rate and will be worth less in dollar terms if the ZAR depreciates against the ZAR.

 

Trade 2

To eliminate the forex risk investors should consider adding a ZAR2 703mil short term bond short to trade 1. This will help protect against the risk of a depreciating ZAR.

 

Outflow               ZAR10 448mil

 

Inflow                   ZAR10 039mil (TGH short)

Inflow                   ZAR  2 703mil (Short Term Bond short)

Total                    ZAR12 742mil

 

Net Inflow          ZAR 2 294mil

 

 

Investors with a greater appetite for risk can consider substituting TAL for TGH. For some reason TGH is down 7% over the last month while TAL is up 1%. Substituting TAL for TGH makes sense as TAL is more expensive especially on the PTB metric.

 

                                                   TGH                       TAL

Market Cap                        $1 750mil             $1 380mil

EV                                           $4 640mil             $4 350mil

PTB                                           1.4                           2.0

PE                                              9.2                         11.5                     

 

ROA                                         4.3%                        4.6%

ROE                                        16.3%                      18.3%

                                 

 

Other Considerations

 

  •        TGH has just paid a 47c dividend. Trencor will only trade ex-div of ZAR1.95 on March 23, 2015. Technically I should have used the ex-dividend price of ZAR57.05 in the write-up instead of ZAR59.00. This increases the premium from 22% to 26%.

 

  •         Trencor has far too much cash on the balance sheet. The current cash balance is double the 2012 balance. Trencor have paid special dividends in the past and this could help narrow the arbitrage gap.

 

 

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

   % owned in Textainer

48.0%

48.1%

48.3%

48.4%

48.9%

60.1%

60.8%

60.9%

 

 

 

 

 

 

 

 

 

Interest in Textainer

         10,804

         11,136

         11,476

         10,434

            7,278

            9,054

            7,041

            6,188

TAC

                466

                311

                254

                      -  

                      -  

                      -  

 

 

Long Term Receivable

                565

                598

                712

                732

                647

                723

                815

                702

Cash

            1,785

            1,518

            1,465

            1,214

            1,669

                796

                727

                499

Net liabilities

              (113)

              (116)

              (132)

              (122)

              (111)

              (159)

              (146)

              (105)

NAV

         13,507

         13,447

         13,775

         12,258

            9,482

         10,414

            8,438

            7,283

                 
                 

 Premium/Discount to Mcap

8%

-5%

13%

3%

-2%

15%

25%

18%

 

 

Conclusion

There are instruments on the South African Stock market which allows one to take geared positions in both TRE and TGH. Obviously, adding gearing to the trade reduces the amount of capital required while enhancing the return that can be made from the 20% mispricing.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

The wheel will turn. Value will out.

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