TAL leases five types of equipment: 1) dry freight containers, which are used for general cargo such as manufactured component parts, consumer staples, electronics and apparel, 2) refrigerated containers, which are used for perishable items such as fresh and frozen foods, 3) special containers, which are used for heavy and oversized cargo such as marble slabs, building products and machinery, 4) chassis, which are used for the transportation of containers domestically, and 5) tank containers, which are used to transport bulk liquid products such as chemicals. 65% and 21% of TAL's revenue are generated from dry freight containers and refrigerated companies respectively. TAL is ranked first in the special containers markets, which accounts for 8% of TAL's revenues. TAL recently re-entered the chassis and tank container markets.
TAL is trading at 1.80x P/B, a 11% premium over its five-year average P/B of 1.62x. During the Global Financial Crisis in 2009, TAL fell to a 10-year historical low of 0.63x P/B, before rebounding sharply to a new historical high of 2.50x P/B in 2011. In terms of earnings-based multiples, TAL trades at 7.29x 12 months trailing EV/EBITDA and 8.38x P/E, respectively.
Strong asset residual values provide downside protection for investors, as new container prices have generally trended up in the last 10 years, increasing the re-lease and re-sale value of TAL’s container fleet.
Financial And Business Risks
TAL is heavily geared with a gross debt-to-equity ratio of 437%. This is not helped by an interest coverage ratio of 1.5 and current ratio of 0.4. If non-cash liabilities such as deferred taxes and net swap liability are added back to stockholders' equity, the adjusted gearing will be around 2.6x. TAL has a target ratio of net debt to revenue earning assets of 70% to 80%. Most of TAL's debt are structured as first liens against various pools of TAL owned containers with 7 to 10 year amortizing terms. TAL utilizes fixed-rate debt and interest swaps for floating-rate debt to match interest rate and lease portfolio durations, average effective interest rate are around 4% to 5%.
TAL has raised $2 billion over last two years to support high level of investment and growth. This is typical of capital intensive industries which requires large amounts of capital to support growth, prompting worries of further fund raising in the future.
TAL's customers are mainly shipping lines, which reported large losses driven by excess vessel capacity and weak freight rates. Management has said that payment performance remains good thus far, but warns that the risk of a major customer default remains elevated. Current receivables days at 40 days remain healthy and are in line with historical norms. TAL's five largest customers represented approximately 48% of its leasing revenues in 2011, with its single largest customer representing 16% of leasing revenues during this period.
Business Quality and Capital Allocation
TAL is one of the world’s oldest and largest intermodal container leasing companies. It was founded in 1963, and became a stand-alone public company since 2005. It is the fourth largest lessor in the world by total fleet size with a 12% market share, but ranks second in container ownership at over 1.7 million TEU. TAL is ranked first, third and fourth in the special containers markets, dry containers markets and refrigerated containers markets, respectively.
TAL’s customers include all of the top 25 global shipping lines, of which the top customers have deep, long-standing relationships lasting for an average of more than 25 years.
Barriers to entry in the global container leasing market are high. The need for global operating infrastructure deters banks, while smaller leasing companies are finding it difficult to raise capital.
TAL has a 58.1% dividend payout ratio and a dividend yield of 7.0%. Dividends are paid out quarterly. For the past five years excluding 2009 where a nominal dividend was paid, dividend payout ratios have exceeded 40%.
Management grew the book value per share of TAL by a five-year CAGR of 6.9%. Key executive compensation of US$5.3 million in fiscal year 2011 represent 4.8% of fiscal year 2011 net income of US$110 million. Only 400,879 share options issued in 2005 remain outstanding.
TAL is trading at 7.29x twelve months trailing EV/EBITDA, a 20% discount to its container leasing peers which are trading at above 9x EV/EBITDA. A 7% dividend yield with quarterly dividend payments makes TAL even more attractive.
The author does not have a position in any of the stocks mentioned.