Trencor might not be typical fodder for a company review.
Cash shell companies certainly don’t appeal to investors these days, especially with new listings activity on the JSE few and far between.
But these are tremulous times on the markets, and a cash shell offering a fair discount on its cash holdings might offer reassurance for jittery investors wanting to park some of their money in relative safety. For those willing to hang on for the medium term, there could be a rewarding payday if legal hurdles are safely traversed.
Trencor previously was the controlling shareholder in container leasing specialist Textainer. The stake — or stakes, to be exact — in Textainer have been unbundled to shareholders, and the group also paid a special dividend of 160c a share in October 2020.
Trencor’s website notes the intention to “distribute cash resources to shareholders as and when these become commercially available”. But the hitch with Trencor is that it cannot immediately distribute the remaining cash holding of about $75m due to a complicated indemnity arrangement — negotiated at $62m — which relates to possible liabilities and costs that might be incurred by the Halco Trust.
Halco, which is being wound up, formed part of a convoluted control structure of the group that dated back many decades. The indemnity unfortunately terminates only at the end of 2024, but Trencor’s share price expresses the view that no huge claim will be made against the cash holdings.
To date, there have been no specific risks cited around such an event, and directors have been interrogated about this matter at AGMs. Frankly, the indemnity looks increasingly like an overcautious and cumbersome legal position.
If investors can safely assume that most of the R1.23bn cash will be distributed to shareholders by the start of 2025 at the latest, Trencor looks interestingly priced.
Conveniently, the group offers an updated net asset value gauge on its website, which tracks the rand value of the cash against the movements of the dollar. At the time of writing, Trencor’s cash — or near cash — based on net asset value (NAV) was sitting at 773c a share. That means the share is offering a discount of about 23% on the cash holdings.
To some investors a 23% discount, measured against the wide 30%-40% discounts applied to some of the JSE’s better-known investment trusts, might not sound too enticing ... especially remembering the indemnity lag (and risks) on Trencor’s money.
Of course, the rand’s recent weakness against the resurgent dollar will have informed recent investor views on Trencor — which is trading near a 12-month high. It’s probably not unreasonable to think the dollar might remain robust while the Federal Reserve is waging war on inflation. Higher interest rates on Trencor’s dollars won’t hurt either — and will help cover the smidgen of head office costs still being incurred.
The bet is whether investors think the rand will be considerably weaker to the dollar in just over two years’ time, and whether there will be better opportunities to grow their capital at low risk in what might be turbulent equity markets.
Looked at another way, Trencor is offering investors a chance to effectively buy a dollar at about R14.25 — but with a stretched lock-in clause regarding possible distributions. Any investor holding a view that SA’s infrastructural challenges will not improve in a climate of increasing political fragmentation might regard Trencor’s shares as an insurance policy against further, perhaps even inevitable, economic ructions over the next few years. And then there is always the chance of corporate action ... at least once the indemnity issue is properly cleared up.
Though cash shells are no longer a hive of activity, Trencor’s offshore cash holdings could appeal to companies keen on a reverse listing — particularly those with offshore ambitions. That said, anyone reading the recent Sens announcements by Trencor will know that a specialist investment vehicle, African Phoenix, has built an influential 16.16% stake in the group.
African Phoenix, which joins Coronation Fund Managers and M&G Investment Managers as Trencor’s major shareholders, might have more in mind than just waiting for a cash distribution.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.