Author Topic: TGH – Textainer Group Holdings  (Read 1622 times)

mjohn707

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TGH – Textainer Group Holdings
« on: August 15, 2018, 06:05:50 PM »
Textainer Group is a NYSE listed leasing company currently trading around 66% of TBV.  The company’s principal asset is just over 3.2M intermodal shipping containers of the type you see around ports or on container ships.  These containers are an integral part of international trade, and the company owns or manages something on the order of 17% of all leased containers, and maybe 10% or so of the total world fleet both owned and leased if I’m remembering the numbers correctly.  The company leases to most of the big shipping companies, and their average customer relationship is something like 30 years.  The leases tend to have good credit characteristics, with special laws that favor the leasing companies and high recovery rates for defaults.

Over the last 10 years Textainer has earned around a 14% ROE, although earnings and ROE in the most recent fiscal year were very weak.  The reason for the low earnings is that the container market tends to be cyclical, and 2017 was a down year because of a period of poor pricing.  As cyclical markets go however, the container market tends to rebalance pretty quickly because containers only have a useful life of around 13-14 years, and there is a short period of time between when new containers are ordered and the time they are delivered to the end user.  So container production tends to respond pretty quickly to the pricing of the end market, and you have a tendency to avoid the big swings you might see in say shipping or offshore service companies who have to order their vessels years in advance.

As of 2Q18 the company is showing higher earnings, and management is reporting that pricing for new leases is improving.  I suspect that over time the company’s earnings will improve and ROE will reflect a reasonable return on the company’s TBV. 

Trencor, a South African company in a similar line of business, controls the company.  Minority shareholders have been treated, in my opinion, fairly over the period I reviewed.  I’m attaching a copy of a spreadsheet with a 10-year summary of the company’s income and balance sheets, and a calculation of TBV as of the most recent quarter.

Current Price:  13.70
Market Cap: 783M
P/E: 38
P/B: 66%
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writser

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Re: TGH – Textainer Group Holdings
« Reply #1 on: August 16, 2018, 07:59:10 AM »
Interesting idea, but how useful is TBV as a metric when the balance sheet consists of 3.8b worth of shipping containers and 2.75b of long term debt? Like, at what rate do they depreciate them, what is their market/replacement value and what is their useful life span?
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compoundvalue

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Re: TGH – Textainer Group Holdings
« Reply #2 on: August 17, 2018, 05:46:15 AM »
Hi
I think it is a very sensible idea. I am actually long CAI due to (imho) the superior capital allocation and a more diversified business model...

compoundvalue

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Re: TGH – Textainer Group Holdings
« Reply #3 on: August 17, 2018, 02:21:16 PM »
Will try to answer some of writser's questions based on my knowledge of CAI (most of the stuff is industry wide with differences in quality of execution between the firms):
- Containers are depreciated over 13 years with a residual value of 50% if memory serves right. That is also a good proxy for useful life
- The market value of containers is very cyclical mainly affected by spot prices of Chinese still and demand by the the shipping industry
- This creates (a typical to any leasing operation) residual risk
- Historically, a typical leasing contract averaged 5 years. In recent quarters lessors have managed to extend the duration. In CAI's case
  average tenor of containers delivered in 2018 has been 9 years
- This basically allows locking in the return for a significant amount of time as well as to significantly reduce residual risk
- There is also apparently a meaningful trend of shipping companies moving from owning containers to leasing them
- Risks: this is a financial business. It takes superior capital allocation capabilities due to the client concentration (all clients belong to one
  cyclical industry) and the residual risk. There are also operational risks
- And finally there's a reason why Buffett said the leasing business is a "scary business". They are using short term capital to fund long term
  assets

All in all I am in just think that the better way to play it is CAI
 
« Last Edit: August 17, 2018, 02:25:22 PM by compoundvalue »

mjohn707

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Re: TGH – Textainer Group Holdings
« Reply #4 on: August 20, 2018, 03:25:19 PM »
Hi
I think it is a very sensible idea. I am actually long CAI due to (imho) the superior capital allocation and a more diversified business model...

I think TBV is a useful metric as long as it approximates the future cash flows and/or liquidation value of the containers, but I’m not sure it’s possible to know with certainty that it will.  Like CV mentioned, the containers are depreciated over 13 years or so, and have a relatively high residual value.  They are also in most cases leased for a decent fraction of their useful life.  What can get you in trouble is when they come off of lease and rates or prices have come down and you might lose money selling them or have to accept lower lease rates.  And there are several factors that can affect prices like the interest rates at the time of the lease, the price of new construction containers which also involves the price of the raw materials, and the supply/demand characteristics of the container market at that moment.  None of this is particularly predictable, and it doesn’t take a huge stretch to imagine a case where you might see some equity impairment if you’re levered three-to-one and a couple of factors really move against you.

That being said, I think the company has had a pretty decent showing over the 10-year period I reviewed, and it was a length of time time where iron ore and steel prices were volatile, there was a financial crisis, and interest rates fluctuated.  The reason for the industry’s stability is that there have historically been some countervailing forces to the positive, the most important of which are the short order cycle of the containers from manufacturers, the limited life of the containers which removes a good portion of supply each year, and the high historical growth rate of the industry.  I think if you’re considering TGH as an investment you’d have sort of get comfortable with the idea that future of the industry will more or less resemble the past, and but again there are no guarantees, and I don’t have any special insight or knowledge outside of what management has related in the public filings. 
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whistlerbumps

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Re: TGH – Textainer Group Holdings
« Reply #5 on: September 11, 2018, 08:50:22 AM »
Why are TGH's ROE's so much below peers?

mjohn707

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Re: TGH – Textainer Group Holdings
« Reply #6 on: September 11, 2018, 04:22:55 PM »
Why are TGH's ROE's so much below peers?

They only have a few public peers from what I understand, and just from memory I believe they're less leveraged
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whistlerbumps

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Re: TGH – Textainer Group Holdings
« Reply #7 on: September 12, 2018, 06:30:43 AM »
ok someone suggested to me that it was due to the Hanjin bankruptcy but I couldn't figure out why...

mjohn707

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Re: TGH – Textainer Group Holdings
« Reply #8 on: September 12, 2018, 07:08:08 AM »
ok someone suggested to me that it was due to the Hanjin bankruptcy but I couldn't figure out why...

You know I think they had a little bump from that, but I would expect that a few guys in the industry did as well
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