Textainer Group Holdings Limited Earnings Decimated by Weak Demand

A slowdown in global trade, combined with an oversupply in shipping containers, has finally caught up to Textainer (TGH). The leading shipping container leasing company reported weak third-quarter results, with falling rental rates and lower utilization rates offsetting the fact that its container fleet has grown. In addition, with a tepid view of the future, the company has chosen to significantly reduce its dividend, opting to repurchase shares instead.

A look at the numbers
Textainer's revenue was lower across the board, with significant weakness in the proceeds it received from selling or trading older shipping containers:

Data source: Textainer Group Holdings Limited.

However, it is worth noting that last year's lease rental income was inflated by $2.6 million from a settlement with a bankrupt lessee, which, when adjusted, results in flat year-over-year lease rental income. That said, the company's total fleet increased by 1.5%, which was completely offset by a 2.6% decline in utilization as well as a decline in rental rates.

While the total revenue decline was minor at 6.2%, the impact of weak industry conditions on earnings was far greater. Income from operations plunged 40.8% while adjusted net income was down 68.4% to $17.7 million, or just $0.31 per share. This is primarily due to the significant drop in proceeds from trading or selling older containers, which carry much higher margins.

Also impacting earnings was a $2.7 million container impairment charge after the company reduced the residual value of its 40-foot high cube containers. Furthermore, it took a $1.6 million bad debt provision after a customer defaulted, though insurance should cover most of that loss.

A look at the outlook
Clearly, these are very tough times in the container leasing space, with that weakness expected to continue. As CEO Phillip Brewer noted in the earnings release:

The outlook for the remainder of 2015 and early 2016 remains challenging. Improved performance requires an increase in demand, container prices and/or interest rates. We do not expect a significant increase in demand until at least Chinese New Year and possibly much later. Maturing leases that are extended will be repriced at lower rental rates. Container prices are not expected to increase in the near term and any increase in interest rates, if it does occur, is expected to be minor. We expect these factors combined will lead to lower financial results in 2016.

Because of this weak outlook, the company has reduced its quarterly dividend from $0.47 per share to $0.24 per share, or by 49%. Commenting on the reduction, Brewer said, "The reduced dividend establishes a level that we believe is sustainable and appropriate for the longer term." That said, the company still plans to return a substantial amount of cash to investors, just using a different route. That route is the initiation of a $100 million share repurchase program. It concluded that this path is best because the "current share price does not properly reflect the underlying value of our assets and the growth prospects for our company," according to Brewer.

Investor takeaway
Textainer is being deeply affected by the weakness in the container shipping industry, which isn't showing any signs of improvement. This is forcing the company to make tough choices, including significantly reducing its dividend. However, that reduction appears to be the prudent move given how deeply its stock has sold off, which is now opening up the opportunity for the company to repurchase a meaningful number of shares. It's a decision that could pay off when conditions start to improve.