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Strategies & Market Trends : Value Investing

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To: E_K_S who wrote (55791)

8/2/2015 10:54:06 AM

From: E_K_S

of 78742

Textainer Group Holdings Limited (TGH)
TAL International Group, Inc. (NYSE: TAL)
Data source: ADVFN Q3/2014 (This is the last quarterly data on file)
TAL
TGH

A review of previous quarter;s dividend coverage and interest coverage compared to
Q3 2014

Q3 2014	TAL	% coverage	TGH	% coverage
EBITDA	$127.4		$104.2
EBIT	$ 73.6	57.8%	$ 62.9	60.4%
Int exp.	$ 27.6	37.5%	$ 22.4	35.6%
Net Income	$ 30.0		$ 59.6
EPS	$ 0.89		$ 1.05
Dividend/share	$ 0.72	80.9%	$ 0.47	44.8%

Depreciation expenses runs between 57%-61% of total EBITDA for this business. Metal storage containers have a useful life of 13-15 years. The EBIT % coverage shows the amount of depreciation expensed and is a non-cash entry to FCF.

Coverage Ratios: Interest and Dividend

I used EBIT to measure the interest coverage ratio. This is the more conservative measure as it takes into account the non-cash depreciation adjustment to revenues. A very high number (over 80%) would flag significant use of leverage. The range of 35%-37% is not large. You still want to look at the total liabilities (specifically long term debt) to see it this amount is getting too large. Total liabilities/ Total assets range 66%-69% which is the upper range especially if there are one time adjustments to assets (ie write downs).

The dividend coverage reflects the amount of the dividend payment that comes out of EPS. You want this to be around $60%. TAL's 80% is a bit high but still quite low when you add back in the FCF from the depreciation expense (drops to 28%).

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The long term View - Is BV growing?

Tal International Grp.(TAL)

11% annual growth in BV

Textainer Grp. Holdings Limited (TGH)

18% annual growth in BV

TAL has/is making larger annual capital expenditures as a % to their BV; 5.35x vs 3.43x. TAL's interest expense coverage is marginally higher as well as revenues.

Therefore, it's still about revenues and any significant impact to those revenues if/when storage container leases get renewed. Also, when new Buys are done for new containers to replace old can impact revenues especially when old ones are sold for salvage value in the 3rd market.

My bet is that their large capital expenditures made in 2013 and 2014 allowing them to build up inventory in the new LNG storage tanks should contribute to revenues and growing BV. The lease revenues and ROC on these LNG container tanks are higher so as they build out their inventory and product mix, EPS should stabilize and/or grow from current levels.
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The Value proposition

TAL - if/when TAL cuts their dividend, the stock may over react to the downside. That may/could provide a good Buy entry point. The company has been investing new capital at a greater rate than TGH (38% more over last 24 months). That investment could/should increase future revenues and BV.

TGH - TGH's dividend is safe. The company has a slightly higher annual depreciation expense than TAL which may reflect's management's conservative approach. They are not making new capital investments as fast/large as TAL but have shown they can grow their BV at a larger rate (18% vs 11%) than TAL.

My approach will to continue to accumulate shares in both companies. I am betting that long term BV in both companies will grow. Shareholder dividend yields will range from 7%-10%.

EKS

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